f b --1 out IT 1'11 an the t - a 59mm by the Ling m' - REPORT TO I JOINT ON ATOMIC ENERGY I 1H fill HTLIHH u uH BY THE GENERAL OF THE STATES Il I'm COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON D C Z0548 JUN 2 0 1967 B-157767 Dear Mr Chairman The General Accounting Office has made a review of policies procedures and practices of the Atomic Energy Commission and of Nuclear Materials and EquipITlent Corporation a Commission licensee relating to accountability of special nuclear m aterials The review was made pursuant to a request made by letter dated September 7 1966 from the Chairnlan of the Joint COlTInlittee on Atomic Energy Also in accordance with this request we have co mpleted similar reviews of two other licensees and plan to report to you in the near future on the re­ sults of these reviews The Commission has recently made a number of reVISIons to its program for domestic safeguarding of special nuclear material and we have been advised that additiona l actions are planned 'which have been designed to strengthen the progranl We are therefore making no recomm endations regarding existing regulations contracts and pro­ cedures The COInrnission and the licensee have had an opportunity to com­ ment on the Inatters presented in this report and their comments have been considered in the report The licensee's written cornrnents and our evaluation thereof are included as an appendix to the report A copY' of this report is being sent today to the Vice Chairman of the Joint Conunittee on Atomic Energy As agreed to by your staff rep­ resentatives vve are making copies of this report available to the Com­ mission and to the licensee VIe plan to make no further distribution of this report unless copies are specifically requested and then distribu­ tion will be made only after your approval has been obtained or public announcement has been made by you concerning the contents of the re­ port Sincerely yours J - c I 1 f ' I Jl a L' r' --V • v Comptroller General of the United states The Honorable John o Pastore Chairman Joint Conunittee on A tornic Energy Congress of the United states ___ __ _ - _ _ I I r Con t e n t s Page INTRODUCTION 1 BACKGROUND 2 COMMENTS ON ACCOUNTABILI1Y CONTROLS OVER AEC-OWNED SPECIAL NUCLEAR l1ATERIALS FURNISlffiD TO NU C 8 AEC regulations and procedures relating to control of spe­ cial nuclear materials by licensees Chronological description of AEC surveys of NUt1EC's Apollo facility Special nuclear material losses at NU £C's Apollo faci1­ i ty Comments on the WANL contract Comments on special nuclear material loss ascribed to the WANL contract Comments on financial settlement of special nuclear material loss under the WANL contract Summary evaluation and conclusion 12 18 38 40 43 47 49 bmLendix APPENDIXES Letter to the Comptroller General of the United States from the Chairman Joint Committee on Atomic Energy dated September 7 1966 Letter to the Dir ctor Division of Nuclear Materials Management Atomic Energy Commission from NUMEC dated December 29 1965 NUMEC's co ments and our evaluation thereof I 57 II III 59 66 -- REPORT ON REVIEW OF ACCOUNTABILITY CONTROLS Ov R SPECIAL NUCL R MATERIALS NUCLEAR MATERIALS AND EQUIPMENT CORPORATION ATOMIC ENERGY COM 1ISSION INTRODUC 'ION The General Accounting Offic has made a review of policies procedures and practices of the Atomic Energy Commission and of Nuclear Materials and Equipment Corporation NUMEC Apollo Penn­ sylvania relating to accountability of special nuclear materials owned by the Atomic Energy Commj3sion AEC and held by AEC licensee at its Apollo facility countability practic s NL EC an We did not examine into ac­ at NUMEC's plutonium facility located at Leechburg Pennsylvania Our review which was made p 11rsuant to a request by the Chair­ man Joint Committee on Atomic E ergy dated September 7 1966 was directed toward an examination of the adequacy of AEC policies procedures and practices relating to accountability as they were applied to Nl EC's operations Also we examined NUMEC's written accountability procedures past and current accountability and fi­ nancial records and certain production records 1 13 KG g9u Nl During the period from the establishncnt of the Atomic Energy Commission in 1947 until the enactm nt of the Atomic Energy Act of 1954 42 U S C 2011 all special nuclear material in this country vas owned by the United States Government and Hith certain excep­ tions was held by AEC and its cost-type contractors operating Gov­ ernment owned or controlled plants and laboratories Under these circumstances AEC responsible for program direction and contract administration was in a position to require its cost-type contrac­ tors to establish systems for control over special nuclear mate­ rial Therefore through a body of policies guides instructions and standards AEC developed a system of control for cost-type con­ tractors designed to demonstrate through appropriate measurement and recording of receipts production and removals and through physical inventories the quantity and location of material on hand at the various facilities The system was designed to localize within a given plant where losses were occurring in order to provide a basis for investigation and possible corrective action Additional controls were provided through AEC surveillance activi­ ties and personnel and physical security requirements One of the purposes of the Atomic Energy Act of 1954 was to provide a program to encourage widespread participation in the development and utilization of atomic energy for peaceful purposes to the maximum extent consistent with the common defense and security and with the health and safety of the public II From the time of the passage of the 1954 act until the enact­ ment of legislation in 1964 perm tting 2 private ownership of special nuclear material all such material within or under the jurisdic­ tion of the United States continued to be under mandatory ownership of the United States Government even though it was more widely held by cost-type and fixed-price-type Government contractors and licensees who were not Government contractors Since 1964 private ownership of special nuclear material has been permissible Al­ though very little of this material has yet passed from Government to private ownership all special nuclear material produced in pri­ vately owned nuclear reactors since the 1964 legislative amendment has been privately owned In furtherance of the Government's policy concerning the de­ velopment of atomic energy the 1954 act authorized with certain restrictions the distribution of special nuclear materials under licenses Secti on 53 Regulatory authority is provided under sec­ tion 161 which authorizes AEC to b establish by rule regulation or order such stan­ dards and instructions to govern the possession and use of special nuclear material source material and by­ product material as the Co nission may deem necessary or desirable to promote the common defense and security or to protect health or to minimize danger to life or prop­ erty i prescribe su ch regulations or orders as it may deem necessary 2 to guard against the loss or diversion of any special nu clear material acquired by any person pursuant to section 53 or produced by any person in con­ nection '7i th any activi ty authorized pursuant to this Act and to prevent any use or disposition thereof which the Commission may determine to be inimical to the common defense and securi ty -k - II 3 On April 6 1955 AEC appI' ved for Federal Regulations 10 erR 70 Tbi j nelusion in the COt e of regulation est lblished the procedures and criteria for issuance of licenses and for the dis­ tribution by the Commission of special nuclear material to licens­ ees and the terms and conditions for such distribution The reg­ ulation is directed primarily to the protection of the health and safety of persons 'larking vi th special nuclear rna terial and of the general public and provides that licensees maintain records show­ ing the receipt inventory and t ansfer of special nuclear mate­ rial In developing the regula tions in 10 CFR 70 AEC considered t he question of 1'lhether regulatory requirements for accountability and physical securi ty of licensed mat- erial should be imposed in addi­ tion to the requirements for the 'protection of AEC concluded tha t h al th and safety the physical protection and accountabili ty con-­ troIs which licensees as prudent businessmep would maintain over special nuclear material because of its intrinsic value and their financial responsibility for its loss or damage and the severe criminal penal ties pr0vided b ' AEC I S governing legi sla tion Hould adequately protect the national interest from the standpoint of un­ lawful diversion Therefore in 1955 a policy was adopted on the basis of this conclusion With regard to criminal penalties the Atomic Energy Act of 1954 as amended provides that Sec 222 VIOLATION OF SPECIFIC SECTIONS --vlhoever o i1l­ fully violates attempts to violate or conspires to vio­ late any provision of sections 57 92 or 101 or whoever unlawfully interferes attempts to interfere or conspires to interfere with any recapture or entry under section 108 shall upon conviction thereof be punished by a 4 ---- - - _ I fine of not more than $10 000 or by imprisonment for not more than five years or both except that whoever com­ mi ts such Cl n offen8e wi th intent to inj ure the Uni ted States ir vi th intent to secure an advantage to any for­ eign nation shall upon conviction thereof be punished by death or imprisoTh ent for life but the penalty of death or imprisonment for life may be imposed only upon recormnendation of the jury or by a fine of not more than $20 000 or by imprisonment for not more than twenty years or both Sec 223 VIOlATION OF SECTIONS GENERALLY --Whoever willfully violates attempts to violate or conspires to violate any provision of this Act for which no penalty is specifi ally provided or of any regulation or order prescribed or issued under section 65 or subsections 161 b i or p shall upon conviction thereof be punished by a fine of not more than $5 000 or by impris­ onment for not more than two years or both except that whoever commits such an offense with intent to injure the United States or with intent to secure an advantage to any foreign nation shall upon conviction thereof be punished by a fine of not more than $20 000 or by impris­ onment for no t more than t ren ty year s or bo th 'I In May 1966 after reviewing its policy which was based on the intrinsic value concept AEC concluded that a change should be made in the direction of placing more reliance on positive require­ ments with respect to accountability controls over licensees There w s among the actions taken to strengthen the program since that time approval by AEC on January 25 1967 of amendments to 10 CFR 70 which will require certain licensees to establish main­ tain and submit to AEC written procedures for the control and ac­ counting for special nuclear material in their possession and to take a physical inventory not less often than annually AEC authorized mMEC to receive and process special nuclear material at its Apollo facili ty tInder license number SNM-145 5 As an AEC licensee Nm1EC first received material by lease arrangement in December 1957 Nill1EC received its first nuclear material as an AEC contractor in August 1959 and since that time has processed nuclear material which was received under lease for cO TIercial work and which Vas received under various types of contracts and subcon-­ tracts with AEC and Government contractors t fUMEC O lns and operates a uranium processing facili ty at Apollo Pennsylvania The major emphasis of the facility is on the conv rsion of uranium hexafluoride to uraniuJll oxide or carbides and the fabrication thereof into products for use in nuclear reactors including commercial pO-O '1er research and governmental applica­ tions The Apollo facility also recovers uranitl from various scrap and res idue rna terials cornITlercially and from its in ternally generated scrap 1JHEC is not equipped at its Apollo plant to prepare uranium metal but is equipped for most operations involving uranium com­ pounds Separate processing and fabrication lines are operated for uranium enriched above 5 percent '0-235 and for uranium of 5 percent U-235 or less Also NUMEC maintains a scrap reprocess ing line for uranium of less than 5 percent enrichment which is separate from the line for uranium above 5 percent enrichment Over the years NUIvIEC has had significant amounts of special nuclear materials under its control NUHEC and AEC records show that NUNEC's receipts and shipments of special nuclear materials from start-up through December 31 1966 amounted to about 21 750 kilograms U-235 and 19 865 kilograms U-235 respectively NUMEC re­ ported losses during this period amounting to about 260 kilograms U-235 or about 1 2 percent of total receipts and an ending inven­ tory at December 31 1966 of about 1 625 kilograms U-235 with a value of about $19 5 million 6 During its investigations of NUMEC's loss experience AEC has noted that NUMEC performed a diversity of processes in its uranium operations some of which were unique and had been untried commer­ cially On one first of a kind contract where a large loss was experienced NUMEC described its operation as an extremely dirty and dusty process II The difficul ty of this job was confirmed by an official of Westinghouse Electric Corporation the Government con­ tractor he advised AEC that there was insufficient experience with this type of process none which was really comparable on which to evaluate NUMEC's processing experience A list of the current principal officials of the Atomic Energy Commission responsible for the administration of activities dis­ cussed in this report is shown below· Tenure of office From To Chairman Glenn T Seaborg Mar 1961 Present Operating and Promotional Functions General Manager R E Hollingsworth Assistant General Manager for Administra­ tion John V Vinciguerra Aug 1964 Present May 1966 Present Sept 1961 Present Licensing and Regulatorv Functions Director of Regulation Harold L Price 7 COt j lENTS ON ACCOUNTABILITY COI'ITROLS OVER ----_ ----------------_ _-­ AEC-OHNED SPECIAL NUCLEAR _ _------_ ­ i'lATERIALS FURNISHED TO NUMEC The Commission in 1955 concluded that the accountability con­ trols which licensees as prudent businessmen would exercise over special nuclear material because of its intrinsic value and their financial responsibility for its loss or damage and the criminal penalties provided by AEC's governing legislation vlould adequately protect the Government's interest In our opinion the problems regarding accountability of specic l nuclear materials at 1 TUMEC re­ late directly to this policy and to the control mechanisms estab­ lished to carry out the policy Under the Atomic Energy Act of 1954 as amended AEC is autho­ rized to prescribe such regulations or orders as it may deem neces­ sary to guard against loss of special nuclear material NUMEC's past procedures and practices for the accountability of special nu­ clear material were not sufficiently adequate to identify losses of uraniuiTI with specific jobs or process areas or with the period of time in which such losses occurred Although Nln1EC made periodic physical inventories and AEC performed a nL®ber of accountability surveys a significant quantity of enriched uranium could not be accounted for in the spring of 1965 when NUMEC prepared to close out a large contract I EC's Because of the condition of records we were similarly unable to identify the specific disposition of this material AEC has stated that although it could not be stated with certainty that diversion had not taken place no evidence had been found to support the possibility of diversion and that other information did exist to reduce such possibility 8 Considering the importance of having a reliable and accurate accounting of the use of special nuclear materials we believe that with regard to NUMEC AEC has utilized its authority for control of such materials in a manner that has been less than clearly effective Also i t appears to have been incumbent on NUMEC to ensure the effective implementation of system improvements since on the basis of the record it should have been evident to NUMEC that its system vas not providing a current and accurate ac­ countability for the special nuclear materials for which it was re­ sponsible Although general guidance was provided by AEC in the form of recommendations or suggestions we noted an standards to direct 1EC rials control system absE nce of definitive in the formulation of an acceptable mate­ AEC surveys over the years have repeatedly identified a need for improvements to NL EC's materials control system and at various intervals have resulted in concern as to the adequacy of NUMEC'8 controls over special nuclear materials For the most part in consistence with its policy AEC has at­ tempted to obtain imp ovements in MEC's system through encourage­ ment and suggestions rather than by more aggressive efforts to en­ sure the existence of an accurate and reliable materials control system In connection with this AEC in establishinb its policy in 1955 noted that if the policy proved inadequate other means of ensuring adequate protection would be considered Considering the concern evidenced a t times by AEC vIe feel tha t other means such as the institution of a resident inspection system at NUMEC to provide assurance that an effective account bility system was being maintained and material was being adequately safeguarded would have been appropriate 9 AEC records indicate that NU IEC has generally responded to suggestions made as a result of the surveys It appears however that NUHEC did not exert the sustained effort necessary to effect and maintain the accountability s Jtem improvements necessary for the localization and timely detection of losses ber 1965 AEC reported that its survey af NU C As late as Novem­ records confirmed the findings of prior surveys that the records which purport to con­ trol internal movement of mateyi 11 were incomplete and inadequate Hith respect to the current E'ituation a t T'JUMEC our review showed that in the past year NUMEC has made relatively signifi­ cant progress in the development of a sound accountability system We noted that improvements are still necessary in the area of 10­ ca lization and timely detection or losses Also on the basis of its most recent survey AEC has yet to be satisfied as to the ade­ quacy of the implementation of m c's system By letter da ted January 25 1967 NlJNEC 'advi sed AEC of the ac­ tions that had been and were being taken to comply with recommenda­ tions in AEC's most recent survey report and NUMEC proposed March 31 1967 as the date fo_' a physical inventory of special nu­ clear material at NU11EC By letter dated February 10 1967 ORO advised NUMEC that it would observe the taking of the March 31 1967 physical inventory and would conduct a survey and submitted for NUMEC's consideration a survey plan swnmary which had been de­ veloped by ORO as a means of arriving at a mutual understanding of the survey plans We were subsequently advised that by mutual agreement be­ tvleen AEC and NUMEC the survey was delayed until April 30 1967 because it was expected that by that time the uranium inventory would have been reduced and a more accurate physical inventory could be taken After considering the history of this case we 10 expressed the view to NUMEC and AEC that this survey should be uti­ lized as a basis for developing a mutual understanding and agree­ ment on AEC requirements and for establishing jointly a fully ac­ ceptable materials control system on a timely basis We were subsequently advised by AEC that its planned April 30 1967 inventory verification had been postponed because of the con­ dition of NUMEC's uranium inventory NUMEC had advised AEC that approximately half of its uranium inventory was in scrap residues NUMEC proceeded with its physical inventory on April 30 1967 and so advised AEC during a meeting on May 4 1967 We were in­ formed that it had bE-en agreed during the meeting that NUMEC pro­ vide AEC with 1 a detailed description of the steps it used to take the inventory 2 all sampling analytical and other mea­ surement data obtained from the physical inventory and NUMEC's in­ terpretation of such data and 3 NUHEC's statement of its April 30 1967 inventory We w'lere further informed that an AEC survey team had arrived at NUMEC on Nay 10 1967 to revievl the current situation 11 AECls principal regulations applicable to the issuance of li­ censes for handling special nuclear material are set forth in 10 CFR 70 Special Nuclear t1aterial '1 and 10 CFR 20 Sta ndards for Protection Against Rndiation These regulations are directed primarily to protection of the health and safety of persons working with radioactive material and of the general public and provide that licensees maintain records showing he receipt inventory and transfer of special nuclear material Under the provisions of the Atomic Energy Act of 1954 as amended AEC is authorized under Section 53 to issue licenses and to distribute special nuclear material to licensees by sale lease or grant Material distributed to lessees under this provision is generally referred to as Section 53 material The act also pro­ vides that the COITU11ission may make a reasonable use charge for ma­ terial distributed by lease under Section 53 The act does not re­ quire a license for special nuclear material to be held under con­ tract with and for the account of the Commission Material so held is generally referred to as non-Section 53 material However non-Section 53 material may also be held under a Section 53 license when there are circumstances in which the ex­ emption from licensing is not applicable Thus the same facility might hold at the same time Section 53 material under a Section 53 license non-Section 53 material under a Section 53 license and non-Section 53 material under a contract with and for the account of the Commission In developing the regulations in 10 CFR 70 approved in 1955 AEC considered the question of -hether regulatory requirements for 12 _ _-- _ _--------_ _ _- ' ' accountability and physical security of licensed material should be imposed in addition to the requirement for the protection of health and safety AEC concluded that the physical protection and ac­ countability controls which licensees as prudent businessmen would maintain over special nuclear material because of its intrin­ sic value and their financial responsibility for its loss or damage and the severe criminal penalties provided by AEC's governing leg­ islation would ade lately protect the national interest from the standpoint of unlawful diversion With respect to accountability AEC subsequently added provi­ sions to part 70 requiring licensees to submit material transfer reports and periodic material status reports to AEC on forms pre­ scribed by AEC AEC's procedures provided that the material trans­ fer forms be signed by both the shipper and the receiver to show agreement as to the data recorded The shipper and receiver must resolve any differences or submit the matter to a referee for set­ tlement During the early years of the program Section 53 material distributed to licensees under individual lease agreements vas Effec­ tive May 1 1960 j EC established a standard Lease Agreement for the distribution of Section 53 material Terms of this agreement included among other pertinent clauses a provision that the les­ see 1 Have full financial responsibility for the consumption and loss of materials and for payment of use charges and ser­ vices as applicable 2 Submit to AEC transfer documents coveting receipts and shipments of material and reports of losses and inventory 13 3 Haintain and make available for p EC inspecti on adequate records pertaining to the receipt possession transfer or use of material subject to the lease The agreement was revised July 1 1963 to further provide that the lessee take at least one physical inventory a year and use his best efforts to segregate special nuclear material subject to the lease from any other nuclear material in his possession In addi tion to us ing the lease arrangements AEC has over the years contracted with private industry for work related to l EC pro­ grams As discussed previously the Atomic Energy Act of 1954 pro­ vides that contractors holding special nuclear material with and for the account of the Commission can be exempted from licensing AEC field offices and their prime contractors entered into con­ tracts and subcontracts with licensed and nonlicensed facilities which provided for the furnishing of the material as non-Section 53 material Originally the terms of these contracts and subcontracts which were for the most part fixed-price differed from the terms of the Lease Agreement in that they generally did not provide for full financial responsibility or for the payment of use charges In recent years however full financial responsibility has gener­ ally been required Material transfer forms and periodic material balance reports are required by holders of non-Section 53 material Under fixed-price contracts involving the use of nonSection 53 material accountability and safeguards requirements existed to the extent that such requirements were contained in the contracts We were informed that the provisions among different contracts varied considerably in this regard To minimize the re­ sulting problems in September 1962 AEC issued instructions to field offices providing for the use of uniform terms and conditions 14 to be employed to the maximum feasible extent by the AEe and its cost-type contractors in connection with the furnishing of non­ Section 53 material under fixed-price contracts involving the use of special nuclear material These uniform terms and conditions were generally similar to those set forth in the Lease Agreement However the uniform con­ tract terms and conditions unlike those of the Lease Agreement specifically require the contractor to physically segregate mate­ rial subject to the contract from other material in the contrac­ tor's possession and prohibit the blending of materials unless the parties otherwise agree and do not require the payment of a use charge Licensees who had cost-type contracts were subject to such ac­ countability and safeguards requirements as might be established by the cognizant AEC field office In these cases the field offices had AEC Headquarters' guidelines relating to accountability systems as ''lell as their own experience vith AEC's operating contractors for guidance in establishing requirements In addition to using the above lease and contracting arrange­ ments on July 22 196 ' ArC adopted the use of a standard Supply Agreement which followed closely the terms and conditions of the Lease Agreement The S pply Agreement is for use in supplying non­ Section 53 enriched uranium to cont-ractors for use under AEC fixed­ price contracts Although NUHEC is licensed and has held material under a lease agreement the predominant quantities of special nuclear material held by NUtffiC have been furnished under various fixed-price con­ tracts either directly with AEC or under subcontract with Govern­ ment contractors Therefore under the fixed-price contracts NUMEC has been subject to the accountability provisions of each 15 contract as -Tell as to the requirements in the 1 icen 3e and the regulations AEC maintains records concerning all Government-o 'Jned special nuclear mater ial F lrthcr all spec ial I11 1clei 1r ma t 3r ial 1 icensees except for a few which possess negligible quantities of material are sub j e c t top e rio d i con - sit e dec 0 J n t Ci lJ i 1 i t Y sur ve y s unci e r the terms of the regulations the license an ArC contract or a lease agreement The surveys were designed primarily to protect the proprietary interest of AEC and they also protection against loss or unlawf l provid d a measure of diversion Criteria and procedures for conducting proprietary account­ ability surveys are in AEC Immediate Action Directive lAD 7400-4 Surveys of Leased SS I laterial dated v 7 OO-8 Sur leys 1ay 12 19f 2 and lAD of Fixed Price Contractor and Subcontractor Fa­ cilities dated July 18 1963 The purpose of such surveys is to obtain an independent opinion on the validity of the data re­ 1 ported Each survey is to include an audit of the materi al rec­ ords a review of internal control measures and independent veri­ fication of the special nuclear material inve ntory including the element and isotopic content Although general guidance was pro­ vided by AEC Headquarters the specific procedures that were to be applied in carrying out the surveys were largely left to the dis­ cretion of the operations offices responsible for making the sur­ veys lIn consistence with the determination 'to strengthen controls over special nuclear material in the hands of licensees AEC by lAD 7402-11 dated April 5 1966 provided for the expansion of the scope of surveys of special nuclear material held under lease and under fixed-price contracts and subcontracts to include a deter­ mination of the quantities and the probable causes of process losses accidental losses wastes write-offs and Qate ial unac­ counted for and an evaluation of the significance of these quan­ tities 16 In consistence with its philosophy of relying on the intrinsic value concept and severe criminal penalties for unlawful diversion AEc did not promulgate to licensees speci fic criteria or standards of performance by which AEC would evaluate the licensees' opera­ tions AEC had adopted the view that prudent business having its own money invested would take all necessary actions to ensure that its assets were appropriately known and utilized for the purposes acquired In consistence with this philosophy on the matter of licensee accountability surveys a document prepared by the Divi­ sion of Nuclear Materials Management and forwarded to field offices in January 1966 provided in part The opinions of the survey team may be affected by the type facility being surveyed At an AJ C-owned and con­ trolled facility inventory control deviations might not be permitted that could be tolerated at a fixed-price contract facility where the licensee is financially re­ sponsible for the material At a fixed-price facility or a facility having leased material the survey team may find itself in the positioL 1 here overall control is ade­ quate but some areas need improvement Unless the survey team can demonstrate loss of control or other violation of contractual terms and conditions the facility may take the position that changes and improvements in the control system are not required or needed HO vever the survey team may suggest changes t t would improve control and at the same time assist the facility to reduce effort or provide more useful data Also at facilities other than cost-type contractors opinions recommendations and sug­ gestions regarding inventory management are not appro­ priate 1 7 DESCRIPTION OF AEQ SURVEYS OF APOLLO The New York Operations Office NYO performed the initial ac- countability survey of the Apollo plant in September 1960 In a i letter dated October 26 1960 the Director Technical Services Di vision NYO advised NUMEC that am disturbed by the report or the survey made by our 88 Nuclear Materials Management group of your plant Sep- tember 26 30 1960 The report indicates that you did not have adequate control over the nuclear material both licensed Section 53 and accountable non Section 53 held at your site The letter thereafter enumerated a number of suggestions and com i ments regarding the need to establish reaponsibility for controls by material balance area to maintain records to show the material inventory in each area to improve inventory taking and to improve weighing and labeling practices NYO in concluding the letter advised NUMEC that because of the excellent c00peration received from staff in seeking to establish nuclear material control the survey would be set aside and another survey would be mad early in the spring of 1961 It was stated that at that time NUMEC would be expected to have es- tablished workable procedures that would meet AEC standards In this connection NYO did not advise NUMEC except by virtue of its suggestions and comments noted above of the standards by which NUMEC procedures would be evaluated the standards were those de veloped to apply primarily to ABC cost-type contractors By letter dated May 12 1961 NYC advised NUMEC that it had completed its second survey of NUMEC and that its review had been made in accordance with principles intended primarily to govern op- erations of cost-type contractors In a summary paragraph the Di- rector Technical Services Division NYO advised NUMEC 18 I am pleased with the great improvement in your opera­ tions since our earlier review last September The com­ ments made in my letter to you dated October 26 1960 have been acted upon and implemented by your staff As a result of the current survey I find that NUMEC meets the AEC requirements for nuclear material accountability The letter also made several suggestions to assist NUMEC in its nuclear material control ' vhich concerrled the need for a cur­ rent procedures manual records for material controls better weighing and labeling practices and the need to recover uranium from waste on a more current basis During the period from May to August 1962 the AEC Headquar­ ters staff with assistance from NYu perfor ed a survey at NUHEC In its survey report which was not provided to Nlli'1EC AEC stated that NUMEC's system of internal control was extremely limited and did not provide a degree of control sufficient to meet AEC stand­ ards required for contractors of AEC-owned facilities The report cited the following matters amcig others which were of concern to the survey team 1 Losses could not be localized to specific process areas 2 Ledgers were incomplete 3 Records did not support monthly material balance reports 4 A sizable backlog of internally generated uranium residues existed much of which 2re not readily identifiable by contract and were stored without an assigned uranium con­ tent 5 Physical i ventories were not scheduled on a routine basis no inventory had been taken between March 1961 and May 1962 The survey report Has reviewed in draft form by NYO One of the more pointed comments by I fYO as that Headquarters' cri ticism of NUMEC's internal control system appeared to be based upon AEC standards fo contractor operation of AEC facilities under 19 cost-type contracts NYO stated that it would be more meaningful to compare the internal control system 1 iith that of generally ac­ cepted business standards II The precise significance that could be attached to this suggestion is not readily apparent inasmuch as such standards as they relate to special nuclear materials were The second facet appropriate for to our knowledge nonexistent consideration is that the operations office in conducting its sur­ vey made in 1961 in order to make the evaluation of mJMEC's activ­ ities used the AEC standards intended primarily for its co t-type contractors AEC did not formally advise survey until October 26 1962 NU ffiC of the results of the 1962 For the interim AEC records show that in a meeting early in October 1962 the Director Division of Nuclear Ma teria ls J vf nagement DNl1 f informed a NTJ lEC offic ial that he was quite concerned over the situation which existed at NUMEC and advised him of the principal corrective actions con­ sidered necessary The Oak Ridge Operations Office ORO had been made respon­ sible for reviewing NUMEC activities effective June 30 1962 Prior to the aforementioned October meeting the Director DNt1M forwarded the report to ORO for appropriate action In transmit­ ting the report the Director advised ORO that the survey indicated that little further improvement seemed to have taken place since the 1961 survey and that in fact e suspect there has been retrogression The Director also stated that the findings had been discussed with NUMEC but that no recommendations had been made by AEC In a letter dated October 26 1962 com rnunicating the Head­ quarters survey results to Nill1EC ORO stated 20 The recent survey of nuclear materials management disclosed a number of points which if corrected by you would improve your knowledge and control of special nu­ clear materials within your plant It is suggested that your internal control system should be based on data developed during processing which would thus provide current and accurate information readily dis­ closing all special nuclear material physically on hand and all losses as they occur ORO suggested specific actions including suggestions to install a general ledger to suwmarize accounts monthly and annually maintain transfer journals currently develop a subsidiary ledger to account for special nuclear material by job and by material balance area establish control over internal transfer documents and take peri­ odic physical inventories and record the results thereof NUMEC responded in November 1962 advising ORO that a complete system of internal checks was being incorporated and that the func­ tions of maintaining controt records were being separated from the physical accountability functions On February 7 1°63 two AEC representatives visi ted NUl'lEC to review the progress 1J jde by NulvlEC toward accomplishing the sugges­ tions made in October 1962 On the basis of the representatives observations during this I-day visit ORO by letter elated April 18 1963 informed NU lEC In view of the significant progress already made and the work currently underway to achieve all of the ob­ jectives we consider the performance to date as very commendable In July and August 1963 a detailed survey was made by ORO The report prepared on this survey did not state the basis or standards Thich were used in performing the controls over special nuclear materials eva uation By letter dated July 12 1963 ORO rejected Nln'1EC's June 30 1963 inventory 21 of NUMEC's NUMEC reweighed certain inventory items at the suggestion of ORO and was advised on September 23 1963 that the June 30 1963 inven­ tory had been presented fairly ORO also advised NUNEC that ex­ ternal material movements had been reasonably well controlled but that internal transactions reflec ing movements of material within the plant apparently had been insufficiently documented and that the inventory as recorded in NUt1EC' s books had not been adj usted to reflect the results of the physical inventory In addition ORO commented that there was a need for periodic reconciliation between the ledger3 and the actual operating re­ sults OHO stated that it is strongly suggested that in order to have acceptable record support for the monthly material balance report entries to the accountability records be supported by written doc ents and that transi rs of material between jobs be avoided when the contracts specify that no commingling is to occur ORO also stated that there was a general need for more expedi­ tious closing of contracts including proper disposition of resi­ dues ORO stated in its letter of September 23 1963 that these matters were presented as suggestions for improvement of material management and the records thereof conversation between ORO and N EC A NUMEC record of a telephone officials in November 1963 showed that ORO officials indicated that they were satisfied that NUMEC was making a good effort toward improving its procedures In February 1964 ORO conducted a review of all special nu­ clear material held by NUMEC under scrap recovery contracts letter dated April 1 1964 Nu C By was advised that its internal control procedures were inadequate The physical inventory by ORO disclosed more uranium than NUMEC was accountable for under some contracts ORO noted in its letter that containers of uranium were 22 not properly labeled that NUMEC was mixing uranium from several contracts 1ich prohibited commingling and that NUMEC was not sub­ mitting complete and factual material balance reports to AEC OROls letter contained the following comments pertinent to its findings If Jar No 1271-2 was mis-labeled and the contained U 0 g 3 is NUt-1EC job no J 4A05l material then NUHEC has violated the recovery contract by 1 not informing this office when the material itlaS processed 2 by failing to dis­ patch samples to NBL for analysis and 3 by failing to furnish batch weights and certified analyses for the dis­ solver solutions A further violation of the contract was evidenced by NUMEC's mixing of uranium from several recov­ ery contracts which prohibit commingling This was brought to our attention by NUMEC's letter of March 16 1964 He accept NUt1EC' s explanation that Container No 1271-2 was mis-labeled and should be identified with Job No 4A05l however since you have failed to furnish us with samples and dissolution data as required by the contract we are establishing your financial responsibil­ ity for Job No 4AOSI at 3 106 grams of 2% enriched uranium yhich is the quanti ty of highly enri ched uranium found during our inventory and 5 368 grams of 2 6% en­ riched uranium hich is the quanti ty of 10 '1 enriched uranium for which you are responsible according to our records Several containers of uranium were observed during the inventory 1 vhich bore labels identifying the material as uranium assigned to Nill'lEC Account No N-0426 This in­ ternal account is not being reportei in NUMEC's Material Balance Report although we understand that a substantial quantity of uranium is being carried under it We have been advised that Account No N-0426 contains lab wastes residues and samples from lease accounts whereas another account Job No N-OLj CPR28 is for sta­ tion material This differs with previous statements con­ cerning N-0426 given the AEC Headquarters staff during the their audit of t·1sy-August 1962 We think it imperative 23 that in order to clear up this apparent discrepancy you give us a statement of your policy relative to entering material into internal accounts The fact that NUl1EC is maintaining internal accounts such as Job Nos N-0426 and N-04CPR28 without our being informed of the transfers made into and out of the ac­ counts is inconsistent with acceptable SS accounting procedures You are hereby instructed to report these accounts in your Monthly Ha ter i alBa li 1I1Ce Repor t and to reflect any movement of material associated Hith these accounts ORO advised NUMEC that In conclusion the results of the subject Oak Ridge in­ ventory confirm the opinion expressed in previous corre­ spondence relating to other SS material surveys that NUNEC's internal control procedures are inad equate The possession of more uranium than NUf1EC is accountable for under some scrap recovery contracts casts doubt on the adequacy of the sampling and or compositing techniques employed for certain types of scrap We intend to visit your plant again in the very near fu­ ture We suggest that you take steps during the interim to correct the procedural inadequacies noted above Failure to comply with acceptable scrap processing and special nuclear material accounting prucedures may re­ quire the AEC to take appropriate action including that 'which 'lould preclude your receipt and processing of spe­ cial nue lear rna terials It Nill-1EC t S president replied to the AEC letter on April 28 1964 and stated that Nill1EC had a new accountability representa­ tive He further advised that We are currently undergoing a thorough review of NUMEC's accountability procedures and books and are trying to reconcile the records with which the former account­ ability representative left us I shall report to you in detail upon completion of this review In the mean­ time I would greatly appreciate your patience so that we can dig into the matters discussed in your letter of April 1 24 I I t I In a letter to us dated January 18 1967 commenting on this survey NUMEC stated in part A careful review of the 1964 survey results as transmit­ ted to NlJNEC indicates that the underlying deficiency was the inability of the system to identify scrap material adequately by contract In order to understand the sig­ nificance of this finding it is necessary to have some appreciation of scrap recovery operations at NUMEC Nill1EC ha s under taken and con t i nue s to und er take maj or first-of-a-kind jobs Such evelopmental work generally results in low product yields with concomitant high scrap residues During the period in question there was a large amount of internally-generated scrap Additionally NUMEC was performing commerci al scrap recovery operations on a large numb r of contracts many of i hich involved less than 1 kg or uranium NUT'lEe's scrap recovery facil­ ities as a practical matter had to be operated in a con­ tinuous fashion to maintain system equilibrium With ma­ terial from di fferent contracts entering the system on a 'heel to toe' basis actual segregation of material by contract was physically Rnd economically impracticable if not impossible It should be noted that scrap material was assayed by contract after c1issolution but prior to processing and that recovered material and losses were al­ located by contract to the best of our ability The dif­ ficulty however in adequately identifying material by contract without total physical segregation is apparent This is not to say that attempts could not a nd ' lere not made to identify scrap by contract but only that such identification was necessarily imprecise This problem has received increasing recognition by AEC in recent years Thus for example AEC now permits commingling of scrap after issolution and establishment of accountabil­ ity unrier scrap recovery contracts without prior approval Indeed the general direction of current accountability procedures is away from accountability by contract See for example the current Uranium Supply Agreement Un­ derstood in the context of current standards and require­ ments it is clear that the findings of the April 1964 survey do not reflect a lctermination by AEC that NUl·1Ee's system ' as inadequate to assure the proper safeguarding of special luclear material 25 I ' Notwithstanding NUMEC's conclusions as to the seriousness of the findings when considered in the context of today's require­ ments the survey team was of the opinion that NUMEC had expended insufficient thought and effort in the interests of establishing an acceptable and realistic accounting structure for the recording and reporting of ISS materials l'1oreover in our opinion AEC's let­ ter of April 1 1964 evidenced serious concern over the adequacy of NUt1EC's then existing accounta ility practices as they related to the scrap recovery operations ORO completed a physical inventory of special nuclear materi­ als at NUHEC in Sep tember 196 LJr Nill1EC was advi sed on October 15 1964 that crossover of material between jobs had occurred but that because the audit phase of the survey was delayed pursuant to NUMEC's request ORO as not ina posi tion to s ta te the extent to which StIch actions were contrary to the provisions of the contracts for these jobs ORO also advised Nill1EC that the percent of mate­ rial unaccounted for MUF sho rn by comparing the adjusted book inventory with the physical inventory was in excess of that which was acceptable to AEC ORO's workpapers show that the largest sing e MUF figure re­ lated to NUMEC's contract with the Westinghouse Astronuclear labo­ ratory WANL a major subcontractor of the Government in the nu­ clear engine for rocket vehicle application program The figures as presented in the workpapers showed the following Grams of uranium Adjusted book inventory Physical inventory 274 248 185 809 88 439 MUF 26 - 1 ORO advised Nt EC that it was recognized that the physical inven­ tory was undertaken while the processing of nuclear materials con­ tinued and that NUI1EC might be able to readily dispose of a suffi­ cient number of discrepancies to inform ORO in the very near fu­ ture that the accounts were in condition for audit AEC records show that in November 1964 the survey was post­ poned for an additional 30 days in accordance with a telephone conversation between ORO and NUMEC to allow a new accountability representative to ass e and become familiar with his duties The following month ORO and Nill1EC officials agreed by telephone that the lapse of time precluded orderly completion of the survey and it was canceled ORO planned to schedule a new survey in Febru­ ary or March 1965 The planned survey was delayed apparently because of circum­ stances which developed in the closing of the aforementioned WANL contract this is discussed in another section of April and 1ay report In 1965 a survey vas made which included a physical inventory verification vi sed th By letter dated June 17 1965 ORO ad­ NUMEC Our physical inventory verification at your facility inclusive of listin vveighing sampling and ledger comparisons has proven acceptable A formal survey report containing certification that your 55 material accounts are valid for all material types with expected and reasonable limi s of uncertainty will be forwarded to you in the near future In the meantime please consider this letter as noti­ fication that our IBM listing of your facility inven­ tory a copy of which was furnished to you at an earlier date is acceptable to the AEC AECls physjcal inventory verification had disclosed a loss of 53 kilograms U-235 on the WANL contract which indicated a 27 financial l L lbi 1 ity on NUHEC's part of about $735 000 to the Junc 17 1965 J J ett21 NULIEC i ldvis _ i O O 011 In reply July 2 1965 tba t In the referenced letter you requested that we notify you as to the acceptability of your IBM listing of our facility iDventory We cannot accept your IBM listing as ful1 7 c p scntati re of our foci 1i t y j r1vcntory for example it fails to include the enriche d material can­ t din e din Ta s t e S oS ue has t h t pre s n el a b S0 111 t e f i 1 t e r s we have in storage As you know we have approximately 700 sue h f i 1 t e C' S VI hi c h W -E eel co nt a ina sub s tan t i a 1 Cp l u1tity of enriched lnc d·crial h eld under our rANI Con­ tract 59-NP-12674 In view of this and before we can accept your inventory listing we feel that due credit should b gi yen to thi s inventory i tern Also it is our position that due to the complexity and extreme cost of establishing an accurate inventory value on he material in these filters the number as­ signed Dl the dLf f erence bc tvJeen recE i pts and ship­ ments unclei- thE' JANL Contract - s 1 h 5 Lldterial is re­ p ocessed to the point where it may be assayed accu­ rately our books would be adjusted to reflect the new inventory This apPi 'oach was not acceptable to ORO In August 1965 ORO transmi tted to NU1 iEC separate reports on the surveys covering ma­ terials obtained under lease agre ment for commerci al work and ma­ terials related to contracts for Government work ORO expres ed the opinion in one report that safeguards control of special nu­ clear materials at NI J1 lEC -VCl S inadequate and in the other report that such control was less than adequate In the report related to material held under contracts for Goverr®ent work ORO stated that this opinion was based on the following facts 1 Book physical inventory differences of U-235 de­ veloped as a result of the AEC physical inventory are excessive 28 2 NUMEC refused to accept the AEC physical inventory and failed to provide an adequate physical inven­ tory listing in lieu thereof 3 55 material has been transferred between jobs with­ out approval of the contracting officers 4 Internal accounts maintained for recovery of resi­ dues have not been reported to the AEC Recommendations to improve specific control procedures ere made in each report After a follow-up review to determine the status of matters noted in the April-May survey ORO reported in October 1965 that NUMEC was in the process of investigating the contents of two bur­ ial pits for material that might have been inadvertently discarded and buried as unrecoverable waste to determine how much of the difference between the book in -nntories and the physical inven­ tories on the WANL contract could be accounted for by this mate­ rial The records show that in each of the years 1961 1962 and 1963 Nill1EC made burials of contaminated wastes apparently in the belief that the wastes contained insignificant amounts of uranium AEC records indi ca te that NtJ1'1EC 'recognized tha t unacceptably high uranium losses were occurring in 196 f l- and that the company con­ cluded that previous estimates of being buried were low urani in combustible wastes The records show that the 1962 and 1963 burial pits vere exhumed in the fall of 1965 and that the recovery operations were witnessed by AfS personnel from several divisions and offices The ORO October status report states that the 1962 pit had been opened and the contents of some drums ha been handpicked for evaluation of uranium content and for determination as to its 29 recoverability A group of drums of sludge from this pit report­ edly had been sampled analyzed and sho '1n to be of 10 '1 uraniwn content A later report on the burials showed that soil samples taken from the 1963 burial pit indicated a U-235 concentration of about 2 parts per million to a depth of about ten inches below the bot­ tom of the pi t and the report contained an estimate that the U-235 content was about 2 2 kilograms According to NL11EC records about 7 L ki lograms U-235 were ultimately recovered from the burial pits and subsequently re­ turned to AEC for credit to the HANI contract On September 9 and 10 1965 an ORO representative discussed in detail iVith NTJr-1EC officials the status of the recommendations made by ORO in the survey reports On the h3 sis of the 2-day re­ view a status report dated October 13 1965 was issued which stated that the report dealt with changes made or finished since April 30 1965--the cutoff date for the survey which formed the basis for the two August reports The report also stated that the review of September 9 and 10 1965 was not a quantitative audit in depth to determine the accuracy of the records presented but was rather a qualitative review to determine the extent and coher­ ·ency of the internal control records system The report trans­ mitted by ORO to Nill1EC on October 14 1965 presented the follow­ ing s mary opinion Based on the subject review of September 9-10 1965 it is our opinion that the nuclear materials control system as currently constituted and operating at Nill1EC is ca­ £ablc of generating a satisfactory material control and safeguards report for nuclear material now being handled by NUMEC Underscoring supplied 30 The report also stated that the safeguards problem noted in one of the August reports still existed because the excessive difference between the NUMEC book inventory and the AEC physical inventory of the WANL job still existed It was pointed out that this differ­ ence would be resolved as part of the settlement and closeout ne­ gotiations of the WANL contract which alould be reported sepa­ rately Nl EC's A survey of controls was conducted by the AEC Head­ quarters staff assisted by ORO and NYO personnel in November 1965 The objectives of this survey were 1 to determine the to­ tal cumulative U-235 loss for NUMEC since plant start-up in 1957 and to evaluate the extent to which such losses could be accounted for in terms of kno loss mechanisms such as accidental losses discharges into tanks sewers etc and other known removals and 2 to attempt to find explanations for the unexpectedly high U-235 loss which was attributed by NUMEC to be material related to the WANL purchase order The report stated that the survey was performed in accordance with the standards intended to cover the operations of contractors functioning under cost-type contracts As a footnote the report stated that normally special nuclear material held by a fixed­ price contractor such as NUMEC that was financially liable to would not scrutiny rather AEC for payment of losses have been subjected to such an i ntensive the survey would have followed the standards set forth in an AEC directive lAD 7400-8 This directive included instructions for the determination of the accuracy of losses and or consumption reported by material holders but did not provide for the evaluation of the causes magnitude and reasonableness of losses 31 The report stated that cn the basis of the survey team's findings the total cumulative loss was established at 178 kilo­ grams U-235 as of October 31 1965 According to the report the inventory contained estimates of uranium in residues which were not amenable to representative sampling therefore the loss fig­ ure was subject to some adjustment either upward or downward upon recovery of this uranium The report stated that on the basis of NUMECts records it was possible to support a loss through kno'vn loss mechanisms of 84 2 kilograms U-235 Deduction of this amount resulted in a total of 93 8 kilograms U-235 unaccounted for since plant start-up The report also stated that the audit of NU 1EC's records confirmed the findings of prior surveys that records which purport to control internal movements of material were incomplete and inadequate therefore it was IIOt possible to identify with a high degree of accuracy the true physical losses which were at­ tributable to any given contract Nill1EC did not receive a copy of the final survey report February 3 1966 however the Director D illM On and other AEC offi­ cials visited NUMEC and discussed the findings and proposed recom­ mendations of the report By letter dated February 5 1966 NUMEC advised AEC that it considered the AEC suggestions made at the meeting to be clearly sound and pointed out the actions that had been and were being taken to implement them On April 6 1966 AEC submitted to NUMEC a copy of the recommendations as incorpo­ rated in the survey report On April 22 1966 NUMEC advised AEC of the status of its efforts to accomplish the needed improvements outlined by AEC From June 23 through 25 1966 AEC officials visited NUMEC to review the progress made by it toward implementing the recommenda­ tions The AEC officials also observed the procedures and 32 practices being applied by NUMEC in connection with a physical in­ ventory that it was conducting on June 25 According to AEC rec­ ords the AEC officials concluded that in general NUMEC had made satisfactory progress in implementing the survey recommendations and in ensuring the maintenance of adequate control over its en­ riched uranium The officials also reported that while they had not made a complete survey which would have i ncluded an audit of the records and AEC verification of the inventory the scope of the review had been sufficient to permit a determination as to whether NUMEC's procedures as recently approved by AEC were being followed AEC records do not indic te whether NUMEC was advised of the results of this review In October and November 1966 ORO assisted by AEC Headquar­ ters personnel made ·a survey at Nt JHEC A survey report vlas transrni tted to NUMEC on January 24 1967 hich stated that in the opinion of the survey team there had been improvements in the area of nuclear material contro since the survey was made in No­ vember 1965 as evidenced by the fact that 12 of 13 recommenda­ tions made in that report had either been accomplished or were be­ ing accomplished The report also stated that on the basis of the survey and discussion wi th i JU11EC' s management the survey team was of the opinion that the ac ' untability control system that had been established by NUMEC on the basis of the company's approved procedures manual was capable of providing adequate internal con­ trol of special nuclear material for safeguard purposes if it was followed in all aspects On the basis of its survey however AEC was unwilling to ac­ cept NUMEC's inventory that In this connection the report stated Despi te th actions t qken the survey team is of the opinion that the SN material inventory report presented by NUNEC as of September 30 1966 does not fairly pre­ sent their actual holdings as of that date because Il a nU1'1EC has not maintained complete records of known process losses of SN material and therefore the quantities of material reported as losses during the period November 1 1965 through September 30 1966 are understated I I I I i j I i lib L-lbel data used to derive the Nill1EC inventory was not sufficiently accurate as to quantity of uranium to provide an accurate inventory I i 1 t c The NUMEC inventory report did not include material contained in approximately 590 items filters and combusti bles stored in the blue bui Iding ·k 11 I 1 1 I Regarding the first point hEC noted in its report that ac­ countable effluent losses through stacks and liquid discharges were not being reported as kno Am losses th refore it was not pos­ sible to obtain a reliable estimate of k r10 vn losses for the survey period NlR lEC advised AEC that such losses had not been reflected in its reports because of unc rtainty with respect to the means of AEC noted that apportioning these losses to specific contracts I Ij I II I I NUMEC agreed to report such losses on a proration basis in the fu­ I ture i I With respect to the unrecorded material in the blue building AEC noted that lr NUMEC management stated that they understood that the AEC planned to measure all filters and combustibles by gamna scan methods and therefore they had not per­ formed measurements Since it never was the intent of the survey team to other than spot check by gamma scan a rni sunderstanding of rha t v lould be done exis ts I One of the eight recommendations made to NUMEC stated that an inventory should be made at the earliest practicable time that will reflect truly the actual physical holdings of SN mate­ rial and that the book inventory be corrected to the physical in­ ventory 'I In transmitting the report to NUMEC by letter dated Janu­ ary 24 1967 AEC's Assistant General Manager for Administration stated It is recognized that improvements have been made by NUMEC in the area of nuclear materials controls particu­ larly in the establishment of satisfactory procedures Deficiencies still exist in following the procedures and in the taking of a good physical inventory followed by the adjustment of the records to the physical inventory data As you lrJ lOW the NUNEC management and control program for special nuclear material has been of consid­ erable concern to us over an extended period of time We therefore expect that you will take prompt action to correct the deficiencies noted In the absence of such corrective action we will feel constrained to consider actively the measures which may be appropriate either in the administration of the Commission's prime contracts or subcontracts with NUMEC or in the exercise of its reg­ ulatory powers NUMEC responded to AEC by letter dated January 25 1967 and express'ed regret that AEC was unable to accept NUl1EC I S inventory as of September 30 1966 NUNEC stated its disagreement with AEC's opinion on this matter stating further that ' the acceptance criteria and the related stati stical treatment of the test results were not those which had been used in evaluating past inventories at NUMEC and moreover that the criteria utilized in the October in­ ventory are basically experimental and 'have not been officially adopted' It is unfortunate that the new criteria utilized in verifying the October inventory were not communicated to the Company prior to the initi­ ation of the inventory Such information would have 35 assisted materially in our preparatioil for the inven­ tory particularly in thf categorization of the mate­ rials to be inventoried and would thereby have assisted in avoiding utilization of too loose or too tight ac­ ceptance criteria as noted in AEC'sl report NUI'1EC stated that it was proposing March 31 for a physical inventory and advised AEC of the actions that had been and were being taken to comply with the recommendations By letter dated February 10 1967 ORO advised NUMEC that it would observe the taking of the March 31 1967 physical inventory and submitted for NUMEC's consideration a survey plan summary which had been developed by ORO as a means of arriving at a mutual understanding of the survey plans ORO advised NUHEC that 'k you should make every effort prior to the inven­ tory to reprocess as much scrap to a measurable state as possible and to consolidate items to reduce the in­ ventory to a more desirable inventory position Subsequent to the February la 1967 letter AEC and Nill1EC agreed to delay the survey until April 30 1967 because it was expected that by that time the uranium inventory would have been reduced because of completion in April of a job involving a large quantity of highly enriched uranium It was expected that with this reduction in inventory and the clean up of a substantial por­ tion of the plant a more accurate physical inventory could be taken We were subsequently advised by AEC that its planned March 31 1967 inventory verification had been postponed because of the condition of NUMEC's uranium inventory that approximately half of its urani NUNEC had advised AEC inventory was in scrap res­ idues 36 1 NUMEC proceeded with its physical inventory on April 30 1967 and so advised AEC during a meeting on May 4 1967 We were informed that it had been agreed during the meeting that NUMEC provide AEC with 1 a detailed description of the steps it used to take the inventory 2 all sampling analytical and other measurement data obtained from the physical inventory and NUMEC's interpretation of such data and 3 NUMEC's statement of its April 30 1967 inventory We were further informed that an AEC survey team had arrived at NUMEC on May 10 1967 to review the current situation 37 s r l l AI -lill I E AB __ f'li' I PJ Al LO SSJ - S AT S APOLLO FACILITY _ NUHZC '-_ ---_ _-- In November 1965 AEC made a detailed survey to determine the total cumulative U-235 loss at NUMEC since st art-up in 1957 and to attempt to find explanations for the unexpectedly high U-235 loss on the HA NT contract On the basis of AEC's survey findings the report stated that the total cumulative loss including kno rn losses discards and MUF at NU jEC during the period from plant start-up in 1957 until October 31 1965 had been established as 178 kilograms U-235 report stated that during this period NU ffiC The had recognized and reported cuwJlative losses of 149 kilograms U-235 or 29 kilograms U-235 less than the amount established by the A EC survey The re­ port also stated that because of a large number of heterogeneous uranium-bearing residues on inventory which could not be sampled some upward or downward revisions of the established loss might be necessary The survey team estimated that of the total of 178 kilograms U-235 lost to October 31 1965 84 2 resulted from known loss mech­ anisms and the remaining amount of 93 8 kilograms U-235 was cate­ gorized as JF MUF is defined as the difference between the phys­ ical inventory and the book inventory after the latter has been ad­ justed for losses resulting from known loss mechani ms such as accidental losses normal operational losses discharges into tanks sewers stacks burial grounds etc and other known re­ movals of material Thus MUF is usually the result of uncertain­ ties of measurements unknown losses and undetected errors in the records o As stated by the team the amount as developed was based on estimates however the loss mechanisms identified appeared ap­ propriate and the largest part of the known losses was traceable 38 _ _ 'I t- - - -- - - ---- -- --- ---- '_ _- -'- to records or could be developed by analyzing existing data and ap­ plying judgments thereto On an overall basis AEC calculated that the estimated loss of 178 kilograms U-235 amounted to about 1 2 percent of total plant receipts since start-up The report stated that This cumulative loss while larger both on an absolute and relative basis than those reported by other commer­ cial facilities conducting more or less comparable opera­ tions does not appear to be so much larger as to bE' un-­ expected -k II During the period of our review we found that additional losses had been disclosed and NUI1El 's recorrJs showed that cumula­ tive losses of U-235 through December 31 1966 totaled about 260 kilograms or about 1 2 percent of total receipts which ' ere These losses reported to AEC through periodic status reports by NUMEC to ORO inclu c1ed knoHn and identifia ble process losses and MUF which HClS disclosed by physical inventories or by material settle­ ments at the completion of jobs NUt-iEC advised us that the in­ crease in losses since the October 1965 inventory was almost en­ tirely attributable to losses ties of material during the incu red in processing large quanti­ int rvening period The AEC report on the NovEmber 1965 survey presented the view that vhile it could not be stL ted vIi th certainty that diversion did not take place the survey team found no evidence to support the possibility of diversion The report added that the survey team and others observed a number of NUMEC's practices that reduced the possibility of diversion With respect to AECl s observation regarding overall losses at NUl'-IEC we were advised that ABC's vie as to the reasonableness of the losses was based on i ts expe1 ience 39 in the nuclear materials management field AEC has not established standards on which to base an evaluation of a contractor's loss performance In regard to MUF we are unable to state an opinion on its disposition Be­ cause of the condition of NUMEC's records a determination could not be made as to the approximate period of time or the process area in which the MUF occurred We found no evidence of diversion After considering all available information including NU ffiC's ex­ planation of the losses related to the WANL contract a copy of which is attached as appendix II we have no reason to question AEC' s conclusion regarding the matter of diversion Co ents on the WANL contract In September 1962 WANL entered into a fixed-price contract with NUMEC to furnish a product to WANL to be used in the manufac­ ture of nuclear fuel elements Under the terms of the contract NUl-'lEC had full financial responsibility for all special nuclear material furnished to it for the production of the product Any excess enriched uranium and all scrap generated by NUMEC in fabri­ cating the product was to be processed as part of the contract price to an acceptable chemical form meeting e tablished AEC specifications and returned to AEC or paid for within 180 days after the final delivery of product to WANL Under the terms of the contract for the first 90 days after final delivery of the fabricated product to ANL no inventory use charge was to be imposed on NU C for the enriched uranium still in its possession thereafter however a use charge of 4-3 4 percent per annum of the value of the material still in the possession of NUMEC was to be assessed The contract also provided for the right of repossession by AEC of the enriched uranium at the expiration of the 180 days 40 • • During the course of the contract NUMEC was furnished with about 1 013 kilograms U-235 of which about 713 kilograms U-235 was delivered as acceptable product to WANL thus NUIvlEC las required to return to AEC about 300 kilograms U-235 On A lg Jst 12 1964 NUMEC made its final shipment of the fabricated product to WANL By agreement with WANL NUMEC continued experimental efforts to upgrade the product to meet new specification requirements Ac­ cording to WN'JL the actual contract completion date was Octo­ ber 30 1964 because on that date WMTL made its determination that the experimental material fabricated by NUMEC after August 12 1964 would not meet the new WANL requirements On the basis of this completion date assessment of inventory use charges was to commence on January 29 1965 and the final settlement date was established at April 28 1965 AEC records NUMEC informed Government and WA1 L According to personnel that NUMEC would not be able to settle the contract on the specified date Further according to AEC records NU1 lEe suggested that ac­ countability for the remaining WANL material charged to NUMEC be transferred to NUMEC's supply agreement previously entered into with ORO 0 By doing so the final settlement date for material losses could be postponed until NUMEC could process the scrap re­ maining under the WANL contract tinue paying the inventory use o In the interim NUtviEC Hould con­ charge The proposal was agreed to by AEC providing that 1 the quan­ tity of material to be transferred be established on the basis of a physical inventory and 2 prior to rhe transfer NUMEC pay for any losses incurred under the WANL contract According to AECl s records t wo l-month extensions of the closeout date were made in order to take the physical inventory 41 As of April 30 1965 the date of the inventory taking Nill1EC h d declared losses under the WANL contract of about 33 kilograms U-235 AEC's physical inventory disclosed an apparent loss of about 53 kilograms U-235 indicating a liahility on NUMEC's part of about $735 000 NUMEC refused to accept AEC's loss computation on the basis that AEC's calculations did not give proper effect to all recover­ able sources of uranium Consequent y the transfer of the account­ ability for the remaining Wfu L not consummated material to the supply agreement was AEC estimated that under the assumption that NUMEC was correct in its calculations N ffiC's sibility would amount to about $650 000 financial respon­ Negotiations were there­ after conducted with NUMEC to reach a settlement on the WANL con­ tract Our comments on the material losses ascribed to the WANL contract and to the financial sett1e ent 42 follow Comments on Special nuclear material loss ascribed to the WANL contract The ABC survey in November 1965 ascribed a loss of about 61 kilograms or about one third of NUMEC's cumulative estimated losses of 178 kilograms at that time to the WANL contract At that time AEC reported that NUMEC had recognized and reported losses of 38 kilograms as being chargeable to the WANL con tract this was about 23 kilograms U-235 less than AEC's calcula tions Notwithstanding extensive reviews of NUMEC's operations neither AEC nor NUMEC have been able to identify with a high degree of certainty the Specific causes of WANL material loss On November 28 1966 settlement of the WANL contract was made An analysis of material transfers under the WANL contract as of that date is presented in the following schedule Schedule of Special Nuclear Material Received from Returned to and not Returned to ABC by Uranium Enrichment U-235 grams percent grams Receipts Total material received by for WANL job' 1 086 946 93 15 1 012 505 Shipments Finished product shipped to WANL 765 089 93 13 712 515 Balance to be returned 321 857 299 990 Scrap recovered and returned a AS of December 22 1965 231 041 89 55a 206 894 December 22 1965 to November 23 1966 159 591 16 40 26 048 Total scrap returned 390 632 232 932 Balance not returned LOSS gain 67 048 aAverage enrichment of the 22 lots returned as of December 22 1965 and additional 15 lots returned as of November 23 1966 bA cash settlement of about $929 000 was made by NUHEC for this material #3 As shown in the schedule NUMEC returned a greater quantity of total uranium than it was furnished but the U-2J5 content returned was about 67 kilograms less than that received Nl EC's explanation of the WM L On the basis of loss contained in appendix II and the foregoing analysis of material transfers under the WANL con­ tract it is apparent that non-WANL material has been returned for 'credit under the WANL contract and or that WANL material was mingled with other material with the result that most of the nop­ product WM L material returned to AEC was significantly degraded This significance is shown by the fact that for the quantity of scrap recovered and returned as of December 22 1965 the dif­ ference bet veen 231 kilograms of 93 15 percent enriched uranium and 231 kilograms of 89 55 percent enriched uranium represents over 8 kilograms of U-235 or on the basis on AEC's published schedule of enrichment charges an economic loss of about $105 000 During our review at movements of the WA L N 1EC we attempted to trace the internal material by material balance areas MBAs MBAs are described in the AEC manual as control units into which a facility may be subdivided to provide closer control of material flows to localize losses and to provide means of simplifying the taking of physical inventories rnAs may be established around in­ dividual processes separate steps of a process separate geograph­ ical areas or organizational subdivisions The NUMEC facility is subdi vided into t-ffiAs and under the company's procedures internal transfer documents are to be used to support the movements of the material between MBAs The internal transfer documents are to be used also for posting to the internal control ledger which summa­ rizes the material balances in each MBA 44 - 1 We were unable to trace the WANL material movements because the records were incomplete According to NUMEC officials inter­ nal transfer documents were not always posted to the internal transfer ledger thus the resulting effect was that the ledger did not accurately show the balances of material at the MBAs During the period of the WANL contract NUMEC did not ascertain losses associated with the WANL contract by MBAs We were advised that during the period of the WANL contract physical inventories were taken on a plant-wide basis rather than by MBAs therefore the re­ suI ts of the inventories were not recorded in the internal control ledger that indicated material balances by MBAs As a result this ledger could not be reconciled with the gen­ eral ledger From our examination of NUMEC's records we noted that losses reported through April 1965 were generally not identi­ fied as resulting from kno -ln loss mechanisms In relation to this NUMEC's records made available to us showed that buri ls of scrap residues were made during the period of the WANL contract these records however did not show the quantities of uranium actually buried although records showed that NUMEC subsequently recovered about 7 4 kilograms of U-235 from the burial pits Also NlJMEC ad­ vised us that part of this problem was a result of its uncertainty with respect to the best means of prorating losses due to effluent discharge mechanisms and as stated previously that matter has nON been resolved A NUMEC official advised us that the internal transfer docu­ ments were prepared when material was transferred and were used as receipts for the MBA transferring the material The official stated that the foremen accumulated the documents but eventually they might be lost or discarded and thus not all documents would be posted to the internal transfer ledger AEC apparently encountered sL ilar problems in its NUMEC's records Clnalysi - of The AEC Headquarters report on its November 1965 survey stated that the findings of previous surveys were confirmed in that the records which purport to control internal movements of material were incomplete and inadequate therefore it was impos­ sible to identify with a high degree of accuracy the true physical losses attributable to any given contract plant-wide material records were bas d AEC noted that the largely on book values of inventory and generally were adjusted for losses only at the tirne of closing a contract AEC's report also contained the following comment In an attempt to establish yields and loss mechanisms di­ rectly applicable to this purchase order WAL'JL contract the survey team requested NUrlE production control and process engineering data on this and other COGtracts The data available 'las of little or no value in this re­ gard Process lots or batches could not be correlated to points in time nor could a sequence ofJprocessing events be established All efforts in this direction were negated when it was learned that many of the re­ quested records had been inadvertently destroyed by su­ pervisory personnel during 'clean up' campaign at the time of an employee strike January 1 to February 25 1964 46 Comments on financial settlement of special nuclear rrL1t ri8J loss under the WAUL contract Under the terms of the contract use charges were imposed be­ ginning January 29 1965 on material not returned by Nill1EC to AEC Final settlement was to have been made April 28 1965 which 180 days after contract completion as determined by WANL las Two I-month extensions of the closeout date were made in order to take the physical inventory and WANL was instructed to take no further action tONard settling the contract until receiving further direc­ tion Such direction as provided to WANL on November 17 1965 and effective November 23 1965 hTANL and NUNEC entered into a supple­ mental agreement under which NUl·tIEC agreed to pay to WANL or AEC by no later than November 23 1966 the amount of $1 134 849 34 rep­ resenting the value of the special nuclear material still chargeable to NUl'llie' s account In terms of m -tterial quantities the amount represented the value of about 94 kilograms U-235 Further under the agreement Nill-ffiC agreed to pay interest at 6 percent per annum on any amounts unpaid subsequent to December 23 1965 Since Jan­ uary 28 1965 Nln 'IEC had been paying a use charge as provided in the contract at the annual rate of 4-3 4 percent on the value of material not returned In a ccordance with the agreement of November 23 1966 Nill1EC in liquidating its liability returned material having a value of about $301 000 and made payments totaling about $834 000 which in­ cluded about $74 000 retained by vlANL from contract payments Also prior to the sSE ssmc nt of inte rest NlTt1EC had paid use charges totaling about $68 900 and totali ng about $25 800 slJh equently had pai d interest In terms of material quantities NUMEC's it 7 J ultimate shortage on the WANL contract amounied to about 67 kilo­ grams U-235 and the settlement necessitated a cash outlay on Nu C's part of about $928 700 We believe that the financial arrangement for settlement of the rnaterial losses on the WANL contract provided reasonable pro­ tection of the Government's financial interest in the special nu­ clear materials A question could be raised as to vhether interest rather than use charges should have been assessed from the date that the contract was originally scheduled to terminate April 28 1965 until the date that supplemental agreement was effective November 23 1965 Had interest been assessed the maximum addi­ tional income that AEC could have realized would have amounted to about $9 400 Another point relates to a financial benefit that may have ac­ crued to NUMEC In explaining how the material losses occurred on the WANL contract NUMEC has stated that WANL material as a result of NUHEC's scrap recovery operation had been mixed unknowingly with other material and was returned under other contracts If it is assumed that this assertion is valid NUMEC in effect realized a deferral of liability for payment of losses under those contracts where WANL material Inay have been returned The financial benefit that may have accrued to r-nn1EC as a consequence of such action does not appear to be susceptible to measurement because f the nature of NUMEC's records SUMHARY EVFlUATION AND CONCLUSION Under the Atomic Energy Act of 1954 as amended AEC is au­ thorized to prescribe such regulations or orders as it may deem necessary to guard against loss of special nuclear material A basic fundamental to any arrangement for control over special nu­ clear materials in the hands of industrial firms is the principle of periodic accounting for such materials To fully implement this principle a material s control system must be devised requiring the use of records and reports showing the quantity of material that should be on hand and the taking of periodic physical inventories to show how much material i s in f i Ct on ha nd Another aspect of this system is the development of records in such a manner as to permit the timely detection and localization of losses As shown by OUL review nei ther AEC nor NUi lEC could identify the spec ific causes for IvlUF of aDQu t 93 kilograms U-235 as of Octo­ ber 31 1965 a substantial portion of which loss was ascribed to the WANL contract With respe - L to the iNL contract the alterna­ tive possibilities that present themselves are that the losses oc­ curred in a number of contracts over a period of years without be­ ing detected and the WANI contract became a repository for such losses or that the losses occucred within the WANL contract itself The concli tion of 1'1UHEC' s reco ·r s do not penni L us to make a cO lclu­ sive det8rmination as to the time or the manner in which the losse3 occurred AEC reviel 'Js and other da ta suggest -eha t the losses oc ­ curred over a period of ye rs Underlying thi s inabi i ty to detect on a timely basis and de­ termine the reasons for such a significant loss of special nuclear CEltlses un erlyin The ultimate or cause in our opinion was the system of control that 49 evolved as a result of ASC's decision in 1955' to rely in f 1c dcing available special nuclear E aterials to licensees on the concept of intrinsic value and severe criminal penalties to adequately protect the Government's interest The proximate causes are that there was an absence of definite criteria to direct or guide NUMEC in the formulation of an ncceptable materials control system and a lack of an effective approach to obtain improvements in the NUMEC system AEC surveys over the years have repeatedly identified the need for improvements to NUr1EC's materials control system and at var­ ious intervals have resulted in concern as to the adequacy of NUMEC's controls over special nuclear materials For the most part AEC has attempted to obtain improvements in NUJ 1EC's system through encouragement and suggestions rather than by more aggres­ sive efforts to ensure the existence of an accurate and reliable materials control system For example considering the concern evidenced we feel that it would have been appropriate to institute a resident inspection system at NUt1EC to provide AEC assurance that an accountability system was being developed and maintained which would afford effective control over the material Although AEC records indicate that NUMEC has generally re­ sponded to suggestions made as a result of the surveys it appears that NUMEC did not exert the sustained effort necessary to effect and maintain the accountability system improvements necessary for the localization and timely detection of losses As late as the November 1965 survey AEC stated that its audit of NUMEC records confirmed the findings of prior surveys that the records which pur­ port to control internal movement of material were incomplete and 50 inadequate Consequently it appears that relatively significant progress in the development of a sound accountability system has occurred only in the recent past A significant factor which we believe may have worked against AEC's ability to achieve the development of an effective materials control system at a much earlier date was that AEC did not define except in broad terms for the benefit of NUMEC criteria or re­ quirements which AEC considered necessary in the formulation of an adequate materials control systern reviews and making suggestions or As a result AEC was conducting reco endations for irr rovements on the basis of criteria which was not necessarily apparent to NU t--lEC Another factor which may have hindered the development of an effective system was AEC's apparent inconsistency i n its dealings with NUMEC Generally AEC reports as a result of detailed sur·· veys would identify the need for improvements these needs in our opinion indi cated serious weaknesses in NUMEC's system Later after brief visits to NUHEC AEC would compliment NUHEC on the progress being made Succeeding detailed surveys would there­ after recite problems similar to those disclosed in prior surveys As an- illustration in October 1960 AEC's first survey report no-­ tified NUy C of the need to establish controls to localize losses its most recent report issued to NU £C in January 1967 had rec­ ommended improvements in this area Also it appears to have been incumbent on NU C to ensure the effective implementation of system improvements since on the basis of the record it should have been evident to NUl lEe that its system was not prOViding a current and accurate accountability for the special nuclear materials for which it was responsible 51 In our opinion had AEC and NUHEC effectively falloy Ted throLlgh to · rard the maintenance of a system which would localize and detect losses in a timely manner it is conceivable that the specific causes of the experienced losses could have been identified In 11ay 1966 after reviewing its policy which was based on the intrinsic value concept AEe concluded that a change should be made in the direction of placing more reliance on positive requirements with respect to domestic safeguards for licensees There was among the actions taken to strengthen the program since that time approval by P£G on January 25 1967 of amendments to 10 GFR 70 which will require licensees holding more than specified minimum quantities of nuclear material to 1 Establish and maintain wTitten procedures for the control and accounting for special nuclear material in their pos­ session 2 Submit full descriptions to AEC of the procedures for con­ trol and accounting for special nuclear material and iden­ tify to ABC the fundamental controls considered necessary for adequate safeguarding of the material 3 Perform inventories not less often than annually In addition provision has been made for expansion of the scope of surveys of special nuclear materials held under lease and under fixed-price contracts and subcontracts to include a determi­ nation of the quantities of and the probable causes of process losses accidental losses wastes write-offs and MUF and an evaluation of the significance of these quantities We believe that AEG's revision of its 1955 decision toward controls over special nuclear materials in the hands of licensees is appropriate The need for this revision became more imperative 52 with the advent of private ownership of special nuclear materials This step in the development of the atomic industry will entail a lessening of the traditional contractual controls under which mate­ rial has been furnished by ASC Also the need for more effective safeguards control is indicated in consideration of the anticipated growth of nuclear power which will require greater participation by private industry in such areas as fuel fabrication and chemical separation and the handling of larger amounts of highly enriched uranium and plutonium With respect to the current situation at NUMEC our revie v showed that in the past year NUI'JEC has made relatively signifi­ cant improvements to its materials control system For example our review of selected transactions after January 1966 showed that through a subsidiary ledger NUI1EC TI1BS maintaining control o -er ma­ terial by individual job and by material balance area and that the subsidiary ledger was being reconciled with the general ledger In addi tion NUr lEC's records of recent burials '7ere more complete 8 nd meaningful Also we noted that AEC's report on its most recent survey showed that 12 of the 13 recommendations for improvements in the accountability system made as the result of the prior urvey had been accomplished or were in Lhe process of being 9 ccomplished by NUMEC We noted that improvements are still necessary in the area of localization and timely detection of losses Also on the basis of its most recent survey l EC while recognizing that improvements have been made by NUMEC in the area of nuclear materials control has yet to be satisfied as to the adequacy of the implementation of NU MEC's system By letter dated January 25 1967 NUHEC advised AEC of the actions tha t had been 1nd Vicr2 being taken to comply 53 wi th recommendations in AEC' s most rec0nt survey report and pro­ posed March 31 1967 as a date for a physical inventory of special nuclear material at NUMEC By letter dated February 10 1967 ORO advised would observe the taking of the Mar 1 N 1EC that it 31 1967 physical inventory and would conduct a survey and submi tted for NU 1EC IS considerat ion a survey plan surrunary which had been developed by ORO as a means of arriving at a mutual understanding of the survey plans We were subsequently advised that by mut ual agreement between AEC and NUMEC the survey was delayed unt i 1 Apri 1 30 1967 because it was expected that by that time the uranium inventory would have been reduced and a more accurate physical inventory could be taken After considering the history of this case we expressed the view to N 1EC and AEC that this sur-ey should be utilized as a basis for developing a mutual understanding and agreement all AEC requirements and for establishing j ntly a fully acceptable mate­ rials control system on a timely basis We were subsequently advised by AEC that its planned April 30 1967 inventory verification had been postponed because of the con­ di tion of NUHEC IS urani un inventory NUMEC had advi sed AEC that approximately half of its uranium inventory was in scrap residues NUMEC proceeded with its physical inventory on April 30 and so advised AEC during a meeting all May 4 1967 967 le were in­ formed that it was agreed during the meeting that Nut lEC would pro­ vide AEC with 1 a detailed description of the steps it had used to take the inventory 2 all sampling analytical and other mea­ surement data obtained from the physical inventory and NUMEC's in­ terpretation of such data and 3 April 30 1967 inventory N 1EC'S statement of its We were further informed that an AEC survey team arrived at NlMEC on May 10 1967 to review the current situation 54 APPENDIX I Page 1 CHtT IOtlI'I o puroRr vlca Ct I I MIVt f tCHARO •• F'ioe l Q CU tTQtf I NOt R Ott No 100001 'n o CAUl' CKAI 'AJ f nvlr P CI 'L L WA I' E H A 'NALL 'rHO ' O ORRI N MO oIOHH I'OUN Til eRAJelI ttO_M£ft CAl-I Y1LLlAM l 'T£' 11•• JOtlN CJI 50H ILL WI I 'Jol Me C iu OCH lY 'O 1 ong ress of tve IOHN T CONWlIl' IOIiI ClITlYK 1Jl1'lli CTClR t niteb §tates JOINT COMMITIEE ON ATO llC ENERGY September 7 1966 Honorable Elmer B Staats Comptroller General of the United States General Accounting Office Vrashington D C Dear Mr Staats This will confirrnthe discuss''jn on Auguat 29 1966 between the JCAE and GAO staff in which ALe repl'esentative3 participated With the implementation of the prh··ate ov nerehip legislation the Joint CornlrJ tt0e has been concerned as to fhe a dequ tcy Ol AEC' B regulation s and contractu d arrangernentEl relating to the acco tllta bility and c feguardin of pecio l n clt ar lTlntcri l The Coxnmittec is particularly inte l ·esu d in asccl'tt o i J ing wb t ch tngcG if any lnay be necessary in exiuting l·cgula tions contracts and procedures particularly with regard to AEC licensees In this connection I v ould vppreciate it if the GAO will revie v the past procedures enlployed by i'- uclear ' laterials and Equiprn 3nt Corporation l'1UJ riEC ior the safegl al'ding a nd accountability cf J EC­ ovri1ed spe cial nuclear lnaterj al The GAO is reque fJtecl to rcvie·' v the written reports of · EC 1 S investigation of the re centl y 1'12 p l't d los s of substantial an ' 0UTJts 01 spcci d nuclear matcriE- l t NUl 1EC and to examine into the deterrnin ltion of loss cha 'sc5 and 3sociated A EC use charges Pal·t i cular cntentioH is requestE d to t2 gi'llcn to a'p ' praising the inlernal controls l nu a ccounto bility of p c ia1 nuclear lnaterial including rev'iew of the COl11 pa ny t 8 iin LTicj al and inventory control records There dc r it is requ sted that the GAO make a con1 parative rev-ie'w of t ·O cr th1'es other cOll1 panie - doing C I'j lnar­ able wod under sirDiia r AEG reg a do n 8 a nd Ol1l 'B cLual a ' ri r ge ments in an eHort to ascertain to v hat extent the situation at 1- fU r EC Inay be unique or if it is charc tb rietic of t he industry 57 fila Al 1I R ' GeRr TU f HENRY H J t C'H W---H aOUfOXI •• HICKl hil O' f''' ''''''' DroR'OIt D • - J - H V t' WAU ACll Vi'-- UTAH C AKL T CUPIT''' N i l'l APPENDIX I Page 2 Honorable Elmer B Staats I would appreciate it if a written report of your findings and conclusions will be Bubmitted to the Joint Committee at yOUl earliest convenience Thank you for our past and present cooperation Sincerely yours figl JlLr Chet Holifield Chairman 58 APPENDIX II Page 1 Nuclear Materials and Equipment Corporation Apollo Pennsylvania 15613 Telephone GRover 2·8411 Cable NUMEC December 29 1965 Mr Douglas George Director Division of Nuclear Materials l ' L8 nagernent United States Atomic Energy Commission Washington D C 20545 Dear Mr George In the course of the past two months representatives of The Division of Nuclear Z·b terials Management have conducted an extensive physical in­ ventory at Nm1EC and have eX llnined the Company's records in an effort to determine the disposition of approxilT19 tely 55 kilograT'is of uraniun-235 presently u naccounted for under Hestinghouse A stronucl8ar J rchase Order No 59-NP-12674 Although the precise dimensions of the materials loss have not as yet been established we fully appreciate the overriding importance of investigating and resolving any q'J 8stion of safeguards connected therewith at the earliest possible date Necessarily in any task as complex as the Com nission's current in­ vestigation YOllr staff 'Hill have derived a vast amount of in forn 'Jltion from the records of the Company and through corrversations r ith rftJt1EC personnel Because much of this data has been derived from old and in some instances inconlplete records or from the recollections of individuals of the events of several years ago the infol' l12tion you have received may be someuhat fragmentary Accordingly I beliove it Hould be helpful if He Here to set forth as com­ pletely as possible our best analysis of the disposition of the material presently unaccounted for under Purchase Order 59-NP-12674 NUHEC Contract 1231 • Unusual Nature of The 1231 Contract In order to place this matter in porspective it ls importa nt to understand the nature of the product and the process reqlured under the 1231 Contract The manufacture of p yrolytic graphite coated uranium dicarbide fuel particles on a productton scale had never been done before In general the process involved the follo'i-ring steps 1 conversion of UF to U0 2 2 6 blending of U0 with graphite and a bindor material 3 pressing of tfte 2 - il i 'i 59 APPENDIX II Page 2 Mr Douglas George -2- December 29 1965 blended material into sinter stock LL intering of the prossed I1 r'3terialj 5 cru shing of the sintered stock to fOrr 1 melt stocK 6 melting of the material by direct arc to form carbide ingots 7 cl shing grinding and sizing of the ingots to forffi fine on-size particles 8 spheroidizing of the particles in a pl3sn tDrch 9 carbon coating of the spheric l particles in an induction heated fluid bed reactor in an atmosphere of methane A nd an inert carrier gas Although the foregoing is only a brief description of the process it may serve to illustrate the complerity of the manufe ctllring operation 1-lhich Nay be characterized fairly as an 8 tre ' ely dirty 2nd dusty process As described belo'A more fully NlW EC' c product rield in this process was quite lOvI necessitating an extensive recycling of terial in order to deliver sufficient product to the customer EA ensive recycling of material as you know inevitably involves a repetition of losses As noted earlier the manufacture of this material was for NUMEC a tlfirst of a kind contract it has never been performed again by the Company Consequently our direct experience factors are limited in terms of comparing the losses on this job with other contracts Nevertheless we believe it is not inconceivable that high losses· -- Dorhaus liD to 30 kilograms of material or 3% -- lTlay have been experienced in this ll1iq e and COl'T1plex operation For instance on jobs involving the saI 'le r lunber of unit cperations but on tAAterial inherently less dusty in nature we have experienced losses of the saITle maGnitUde Even assurning hOloJever that such losses Here experienced this i-rill not fully explain the disposition of the total amount of U-235 presently unaccounted for approxL 'l'J ately 6 percent of the total U-235 received by 'ful IEC for pro­ cessing under the contract Such an explanation must be derived from an examination of NUi'1EC' s scrap recovery operations Scran Generated Under 1231 Contract The basic reference point in an inauiry into the disposition of 1231 material must be the amount of scrap f 8nerated under the contract As used in this context losses are defined as both the ccounted for and the unaccounted for losses i e all Material not shipped to the customer as product or returned to the Commission as recovered from scrap 60 APPENDIX II Page 3 Mr Douglas George -3- December 29 1965 The records of NUf mC' s CP-2 facility in Hhich the initial conversion of UF to DO' HllS pm'formed show that 12 1 0 kilograms of rrw terial entered the 6 facility for c nv rsion under the 1231 cantors ct It should be noted however that only 10 Y kilog1'ar ls of UF 6 cont0 ining 93 percent U-2J5 were furnished by the custorl 3r for conversion under tbe contract The difference 153 kilograms represonts the' q'J antity of recycl -sd material required to make the final product accepted by the customer It is therefore apparent that 153 kilogr '3 'r1s f l'ecycle material Hero at sone point reprocossed in NU1lliC's facilities I lustrativ8 of t - 'G process by Hhich sl ch reeycle material is generated 1s the inj tLd conversion UF t tC va in the CP71 r 1 Cility NUHEC's records ShOH that this conv0rsit5n roB s performed in C a Et 'discrete batches of apprOX_Lrru 1 tely ita 2 2 2-52 150 ntl 250 kilograms each spaced three months apart DebtTeen Octobol' 1962 and October 196J One 1·muld expect to leavo oGhind j n the first pass throllg h the facility approxirn ately ten kilogra Tl0 of l ' E Lerial from 83 ell batch This n m- li eld uranium settles in clean-up materi8 1s ani in the for 'l of other J l3tes 'Ihich are sUbsoquently recoverod 8 nc1 recycled Thus in the inj t j a J step of the process at least 50 of the 153 kilogrBt1s of scrap de sed bod at078 t ' JerG genera ted It is also clear in vieit of the fact that 108'1 ld 1G r8 l'l1S Fere ' t ' '--' ' '''' ' '' processed to prod lc8 kilograms 01 end prOGue ' ib 1 that NT JHEC had as inventory after final prod 1 ct bjp 2ri '_ ' 1 j2 ldlograms of material proce s los es aside ich it was requirej to reprocess 'Cc • • • •• •• Finally it shoulcl be noted th'lt 65 kilogra i3 of uranilJ ' j in the form of U0 prel ared by i' jl· 'J C frorr' the afo cc ' entioned sc cap Here rejected by the 2 custonler This '1 terial too s requirso reprocessing In surmntl r l a t L l of 54 2 kilograms 153 324 65 of scrap uranium generated under thE 1231 ccntra8t · e1''3 at v8 rious ti 11'3S injectcd into N1JI1EC· s scrap recovery strDdm It is in the reprocessing of this 542 kilOGrams of Inatorinl t n 1t there exists the gl'satest po - ibility of I 1 b ing and consequent allocation of sp88i31 rncl e r material to other contracts The possibility for the 9 110eaticn of rt c tt rials generated in the recovery of scrap to contracts other tha n 1231 is quite groa t in vie- of the manner in · hich NtEEC's scrap reco' ory Op91'ation 1' S conducted A scrap reCO i T8 cy f' Jcdli ty in a company lundl-i ng a large nU llber of special nuclear fila Lerialfi c oncracts e lch ' 21' cannot be reserved for en extended period Gf Urr18 to recover all of tb9 scrap that may be generated 61 APPENDIX II Page 4 -4- Mr Douglas Goorge DGce ber 29 1965 under a contract Hhi h may r ouirG a year or morc to complete anrl vlhich from time to time may gener 1te quantities of scrap I 'v'3 terial Of n ess1t y the scrap from a long-term contrfict must be schs hled for recovery interrni ttently with scrap r 1aterial from other contracts Such vias the caS8 1-ri th respect to the 1231 scrap material A IT ajor cle m-up behleen jobs Hould be required in ordol' to insure against the clovmgradinF£ of 1 natorial in an interr'littent operation of this type Such a clean-up itself hOi-iever ' rill f8nerate addition 3l losses since material is bound to be lost in the huge amounts of solution Y' '- pd red to adequately clean tho cornplox efJuir T 'nt in the plant oreover since the scrap recover v oper tion involvos a solvent ex­ traction process one r 1ust reach near sa C1J l'F tion 6' llili t ri un in the plant before extracted rrL9 terial is chen ically clean Thus the first l1aterial removed from the process must alv qs be recycled to achi ve clean material Correspondingly the ffic-tterial l2 t removed from tho process is as a general lnatter never pure enough to be used in end product and therpfore again becomes scr p The foregoing 5uggsfts the economic ir easibility if not the practical i trpos sibility of totally ssgre ' b n each job in a plant with a vie · to ard finishing each job before movin£ to tho next To off et these consequE nces it was m lliC's practice to segregate material by contract only through the point of dissolution at i·Jhich point the accountability under 1 civen cont l a ct was established 1 ere2fter our scrap recovery equipment was operated on a leel t ' toe II ba sis · 1tlJ01Jt seGrer tl t50n of m 'lteri· l hehreen jcbs Thus if scrap from ten jobs for example was processed in one recovery campaign cert2 in assurr ptions had to be marie in D ssigning the recovorod rl lt6r-1 al beh- een the originating contracts This assigrnent was made on a basis proportionate to each contract's feed contribution Losse s ' ere calcu13tod in the manner described belo·H Vie believe that this method of scrap recovery operation is generally consistent with industry practice Disposition of 1231 Materi l 1962-63 With this 5 ruonnation as background it becomes pertinent to 8Xflmine the scrap recovery contracts most likely processed at mmEC rlu l 'ing the sarna time the 1231 contract vJas active T ble I attadv 'd lists these contracts -Je beli-ev e these jobs were run on a heel to toe basis in conjunction with the recycle and or scrap materi ' l fron Contract 1231 Excluded hOvlever are those contr cts involving the rocessing of uranil m of less than enrichment Since NUMEC maintained a sq arate rf'Oprocessing facility for material less than 51 enriched it is unlikely that such material would have been run on a heel to toe basis lith highly enriched material 5% 62 APPENDIX II Page 5 Mr Douglas George -5- Decenmer 29 1965 The total quantity of 1Jranillffi represented by the contracts in Table I is approximc tely h70 kilograms of U-2J5 These jobs -rere closed ont with an average overall U-2J5 loss of approxiffi tely 1 5 per cent or 7 kilograms The avera e 1 5 1 '-'1' cent loss figuro was selected In the basis of our best estimate at tho time of the losses 9Y perienced in our recovery operation A definite fiC lre could not be 8 tabli shei since in the 11· el to toe prcces5' described above thero was no complete clean-up between reprocessing campaigns It is important to not at this point that duo to the complexity and qua ntity of the scrap on h md during 1962 1963 there Has a large uncertqinty with respect to total plant accountability durint thi3 period As a result there was no clear eviden e at the timo to indica to that the 1 5 per cent figure was inaccurate It was only wi thin the last year durinf3 vrhich NtJ'NEC performoctt1 Vo large scrap contracts of 108 kilogr3ffis i T ' 0-1 JJ02J and 137 kilograms I 'T 40-1 33761 that it bcccifle evident that the losses l - C 'e reater than those initially anticipated In both cases a closed acc u ntability Has maintained that is there I-J'as no eross-Qver betv rcen jobs In the first case losses Here 4 1 per cent in tIlE econd 3 0 per cent The second contract is Jpproximate because final ccountabili ty has not Leen established In both casS s the scrap involved was similar i n nature to thA t process8d dnring 1962-196J and accordingly utilized no rly the same' process cher istry and equipm mt On the basis of our eurrent 8y pori8nce it lC'ulri aprear that a loss f2ctor of J 5 per cent may h lve 6en l'e appropriate than Gne per cent On this basis s the losses expcriGr cedmder tLo scrap reCOV817 contr9 cts iter 'lized in Table I could havo been i6 5 kilograms inst aa of the '7 rcilo 6 rarrls declared This would suegest that approxir tely 9 kilOGrams of 12J1 contract U-235 could have been inadvertently rr i xed and ret 11rned -Tith material under these scrap recovery contracts t1 To further subsL mtiate the possibility of mixing of rnatsrial frem the 12 1 contract 18 1'81'31' you to a lett r of July 8 1963 froPl A H Kasberg r-rm·mc to T C Johnson 1destj ngr o lse Astl'Orl1 1C _ear 8 copy of rhich is attached This le t e r irj icates that 30 ki1cO Y'UlE5 ol cu -of-specific tion U0 2C 3 gs 2 of U V2 S scl18 c11l10d foi ' scrap ret J L·n to OBI-' fadg8 The onJ y suppcrtlng 8VJ dence to ShOH that this material Has rGi urned is nn ontry on j·a·1E-CCC-9S a CODY of which ts 8 ttached inc U ca tin th l t only 21 L kilo rb ms of uraniU l 51il h tly downgraded was returned This suggests the possibility that 4 6 kiloG ans of 1231 contract '1 9teri ll may have in the course of scrap rocovery been returned under other contracts 3 I I l f 1931' A furtLer eXfHnple is illu str t8d in tho attached memo of October 5 from C Beltran- F_ C to F Fcrscher ·itJHEC describing a degradation incident involving 2 kilcgrams of 12J1 contr wt material - 'le find no evidGn e thst this rncctsl'ial was rehn'ned as 1231 rn ateriaL It can be reasonably inferred that this ll1 lt ' rial may have been r Jcovored along r i th othor scrap material alld s lb3ecpently rot1 rn ·dt 11though pos ibly rnisider tified 63 APPENDIX II Page 6 Hr Dougla 3 George -6- December 29 t 1965 These are but examples of spocific instances in vrhich 12 1 contract material r ight have been mixed rith other scrap The fact of overrid i ng importance hOH8ver is that beca'J se of tho n J ture of NUi §C' s scrap rocovery opera tions it is highly probable th lt scrap from the 12J1 contract rn ay bave been returned under other purchase orders f Disposition of 12'31 Haterial as a Function of Overall Compony Oper3 tions 1960- 963 Th0 foregaing analysis covers or y the period during which 1231 contract material Has eing processed at N·Ur-iEC It is important to nc-te t hov sver that the same type of scrap recove17 opel''1tion · ·ias conducted at H1JtiJEC prior to the arrival of thE 1231 rna terial cr0a tin tho S 1JtlF' po sibility of unavoidable mixing of r1aterial In the period prior to and during 't-rhich 1231 m J terial waD being processed at HtJ'HEC a large nurnher of scrap recover Y contracts involving 1020 kilograms U-235 in sCY'ap rere processed and closed including contracts Sh01r 111 in 'l 3ble I plas additional contracts shovm in Table II Using an estir'l3ted aver e 1 5 per cent loss figure NU1·1EC declared losses of ap­ proximately 15 i- o r2ns J-235 on t1l8se contracts Had the rr ore recently derived 1052 figure of 3 5 per cent beerl used losses could have amounted to 3 kilo ra s U- 35 It is pe-ssible that the diff r811ce arr onnting to 21 kilograms U-235 HJS compensated for through the return of scrap r atcl'ial from other purchase orders closed out before and c' lring tr e 1231 contre ct Scrap fro n the 1231 contract it can be reasonably surmised r- - 2 Y in turn have been returned 1Indar these p12T'chase orde ' Although it is not possible to state that a given amount ' f 1231 P1rl terial VJ tS returned u nder anC'ther given purchase order it is neverthe­ less probablE that the net difference - 21 kilograms - which includes the 9 kilogra s discussed above has in fact cernA to reside in the 1231 contract The 1231 contract has bocome the final repository of these esti ted losses through a chain of relatively recent Events It is olLly vrithin the past year that through a concerted measurement effort and a reduction in the W 1EC inventory it became possible to measure l th a reasonable c rtainty the J11aterials loss experienced at mrr·1EC Afte l a close-out of all in lctl ve NUl'1EC contracts only the 1231 contract rem ined as the identifiable point for all other prior rnisassigned losses With respect to r 1EC's over-all facility operrttion I believe your analysis Hill indicate that HUHEC' 5 loss experience is rell vdthin the ranga one might reasonably expect in a facility such as ours Mor ' over our loss experience is probably not significantly higher than that of other facilities of a like nature AccordinglYt the possibility of any diversion of special nuclear material can be discounted with reasonable certainty 64 APPENDIX I I Page 7 Mr Douglas George 7- December 29 1965 I hope that this inforIMtion will assist you in your investigation of this matter Should you desire any further information please do not hesitate to calIon us Very truly yours j 4N fl c ' s A Weber Accountability Representative SAW geo 65 APPENDIX III Page 1 NUMEC' S COf'l1 E 'I AND EVALUAT ION ----------S- - -OUR - ----_ _--_ _­ commented on our draft report in a letter dated - NUNEC _ -- April 7 1967 and these comments were further explot'ed 'li th NUMEC representatives in a meeting on April 11 1967 We were advised that NUMEC's comments vlhich follow together with our evaluation thereof were made w th the understanding that this report i$ one of several examining the efficacy of accountability controls at a number of industrial facilities and therefore that the conclu­ sions expressed by us are not necessarily unique to Nl JHEC The un­ derlined material quoted by N1JHEC was included in the GAO draft re­ port submitted to the company for comment rt 1 t_ 'proce t _I- __ nd -1 I t s es for he ac c ull 53 r2 t1 trL2J spec iaL_ nuc e0 r-J l2 t rla 1 l PO s' f fie i 1v a d'2g 3 te t _ i dc Q tify ' '0' NU1jJ t S_yE lo s s _Q f _ rani I ri areas_ or th § E'2 fic _i2l s_ Q _ rocess · rith __thc_ 2S riQ 9 of time in U 1ich such losses occurred ' This opinion addresses itself to one of tHO principal facets of a safeguards system namely the procedures purporting to control intern8l movements of material and the mechanisms for reporting thereon An adequate safe­ guards system however has another significant element ­ the control of external transactions The accountabil­ ity requirements of 10 eFR 70 as initially published were basically devoted to control of external transac­ tions We believe the record will show that trans­ actions involving the introduction and removal of mate­ rial from the Apollo plant have on the whole been well documented and controlled Accordingly we offer for your consideration that the above-referenced statement be amended to read as follows 'Although the record indicates that external trans­ actions those involving the introduction or re­ moval of special nuclear material from the Apollo plant have been reasonably well controlled and doc­ ullented in our opinion NUMEC's internal controls 66 APPENDIX III Page 3 This statement is unnecessarily vague and susceptible of an interpretation which we do not believe is intended The report notes that the principal underpinning of the Commission's 1955 policy Has the expectation that fi­ nancial respoGsibility coupled with the criminal penal­ ties involved would provide the incentive necessary for individual companies to create and enforce an adequate accountability system The report then expresses the opinion noted above that at least with respect to in­ ternal controls NlJHEC's procedures have in the past been inadequate We believe the ultim3te conclusion in­ tended iIO'o' is 'Also it appears that financial responsibility the essential underpinning of the Commission's 1955 pol­ icy decision with respect to materials accountabil­ ity failed to provide the expected incentive for the creation and enforcement of an adequate system of internal controls at N1J1'-iEC to identify losses of uranium vi th specific jobs process oreas or time periods ' We suggest the foregoing as being more accurate and representa ti ve of the cone Ius ion intended by the report 'I We agree that the use of the term 'prudent businessman con­ cept in this instance could result in misinterpretation Accord­ ingly we have revised this section of the report to more clearly indicate our position 3 ' AEC records in_d ica te tl a t NUMEC has gen­ era lly responded to S l gf estions made as a re­ suI t of tbe survey s HO' ' ver ita p2 a -s_- Dat NUHEC did not exert the s'llstained effort­ neces­ --_ _---------sary to effect and maintain the accountability system improvements necessary for the localiza­ tion and timely detQc ion of losses ' The record in our view does not support the conclusion expressed in the second sentence above The survey reports 68 APPENDIX I I I Page 4 over the past six years repeatedly note 'significant pro­ gress ' 'commendable performance' and 'positive coopera­ tion' by NUl '1EC Reports to thi s da te continue to note significant improvements in NUHEC's accountability sys­ tem To the extent that deficiencies have been noted from time to time it must be remembered that an account­ ability system is not static As new procedures are employed - and this is particularly true at Nill1EC where as your report notes 'first of a kind contracts' have been characteristically performed - the accountability system must often be modified Moreover certain objec­ tives of a good accountability system particularly in relation to the localization of losses pose a never end­ ing challenge That a recommendation relating to the lo­ calization of losses is made repeatedly is not an indica­ tion of a continuing deficiency but rather a call for in­ creased effort to meet a continuously moving target AI though many of these points are made else' vhere in your report we believe they should be included$ at least in summary fashion in the last paragraph on Page 7 of the draft report in order to place your statement of opinion in a reasonable context As we mentioned in the report on a number of occasi ons AEC reports and letters resulting from surveys and visits to NUt'lEC do comment on NilllEC's progress and atti tude in a favorable manner He agree also that a sound accountability system cannot remain static In this connection N lEC should have anticipated the need for and i 1itiated changes to its accountability system to afford proper lo­ calization of losses The record which contains repeated AEC reG­ omrnendations and suggestions relating to localization of losses seems to indicate that Nl1 1EC did not aSS1 1rne such initiative but at best may have at times reacted to the initiative provided by AEC We believe that the overall record of NDrlEC's exp2rience in this area of activity clearly SUppoT'ts the view that NUI lEC did not exert the sustained effort necessary to effect and maintai n the 69 APPENDIX III Page 5 accountability system improvements necessary for the localization and timely detection of losses 11 4 I 'do' ORO noted in its letter that NilllE as mi ing uranium from several contr2cts which prohibi ted comrninglir th t t oiltainers of l rca q J 11 le r e J ' r 1 y 1 abe 1 _1 t__ _C2 J d _ t b 1 t NU1·F - C Ivas not SUbi l tting cOrt1Dlete and factual material balance reports to AEC I The foregoing SUJrl l1ary of the Apri 1 1964 survey report is misleading To the extent it implies a deliberate com- mingling of material it is in error The only reference to commingling in the AEC's letter is promptly accompanied by an acknowledgement that such com ingling was the result of an inadvertent mis-labeling of a container of material It should be made clear in your report that NUMEC has not engaged in and has never been accused of the unautho­ rized commingling of material The reference to incomplete or non-factual material bal­ ance reports is likewise out of context The AECls criti­ cism was aimed at the existence of two internal scrap ac­ counts one for lease material the other for station ma­ terial of which the AEC was aware but which had not been reflected in the Company's monthly material balance re­ ports In accordance with AECl s instructions subsequent material balance reports h3ve reflected these scrap ac­ counts There was not however at any time an attempt to withh8ld data not already known to AEC We believe your discussion of the April 1964 survey report should be amended to reflect these f cts In the same vein we would like to request some modest expansion of the paragraph outlining the position ex­ pressed by NUMEC in its letter of January 18 1967 con­ cerning inter alia the 1964 survey This paraphrase of our position fails to convey an appreciation of the spe­ cial problems associated with accountability for materials in scrap recovery operations W2 suggest in the alter­ native a direct quote from our letter of January 18 1967 beginning with the third full paragraph Page 4 careful review and ending with the paragraph continuing over to Page 5 to assure the proper safeguarding of spe­ cial nuclear material • ' 70 ·I• ' APPENDIX I I I Page 6 We have expanded the report to delineate AEC's findings re­ sulting from its survey of February 196 and NUHEC's position on the significance of these findings as expressed in a letter dated' NUl' IEe concluded that lhen considered in the January 18 1967 context of current standards and requirements the findings of the April 1964 survey report would not reflect a determination by AEC that NUMEC's system vas inadequate to ensure the proper safeguard­ ing of special nuclear material the survey team that N1JrJEC had It was however the opinion of E ' xpended insufficient thought and effort in the interests of establishing an acceptable and realistic accounting structure for the recording and reporting of special nu­ clear materials Moreover in our opinion AEC's letter of Apri 1 1 1964 advi sing Nu1 lEC tha t Failure to comply with acceptable scrap processing and special nuclear material accounting procedures may re­ quire the AEC to take appropriate action including that which would preclude your receipt and processing of spe­ cial nuclear matcrials evidenced serious concern over the adequacy of ing acco lntabili ty Nl ffiC's then exist­ practi ces as they related to the scrap recovery operations 5 ' QJ39_ Cl r o S1 YJ 3 t NUJ J1 g h t tbS _ p_ rceS U _9f ma gxJ 5 L J · f S_ L l 1 1 __f 0 j _ fdF 2- _ l t 1 € d l Y_ c am E Ij L 1- _t t S __ 1 _ - _F2 SL 2 QJ __ i r v_ n _C2X Lto 11 2bY i-_ 5l - t--il v · _ U ·_'2 17 Q _ S1_1 1- c ql l t_1 0 S of l1 0 J L1 _ EI 2 X_ _ J_j__ _q D_t __1 · z _ L 3_ S _ Rt rc n _ 19 s_Qj -_ _ D_i · i __ D _ · _15_ Q_ I g_ n 1 _ · L 23_2_ _si 6 01_1 I _ _nt lQ s of 1 s02d_ n c12 · r l0 9teria 0E 9- t l t - SL_ 13 J _ tll' s I 0 rc I t t S ·1£ E 0 I -0 ­ C SS 2_t_J LClt · 11j -C l__ '3 _acC2 TY '0P l 9 tC2 AEC I The foregoing Hhilc su bstanti_ally a direct quote from an AEC l tter of October 15 1 6 LI uses the term 'MUF' erroneously imply i ng that an lMUF' is a 'loss ' As your 71 j 1 II f j r 'I APPENDIX III P3ge 7 own report corre2tly nOLes MUF is merely a conve­ nient means for expressing the uncertainty on a given in­ ventory It is not a 'loss' but rather as you note 'the result of uncertainties of measurements unknown losses and undetected errors ' Moreover in seeking to relate a MUF to the quantity f material handled it is not meaningful to compare the adjusted book inventory to the physical inventory and then take the difference and express it as a percentage of the adjusted book inventory The MUF is more properly expressed as a percentage of the total amount of material received or shipped in a given category or under a given cont act Based on the foregoing we suggest that the referenced statement be deleted and be replaced by a statement such as 'ORO also advised NL EC that the MUFs disclosed by its physical inventory were in excess of that which was normally acceptable 0 AEC ' Because the percentages and tprms used in the cited sentence may be subject to misinterpretation we have revised the sentence in accordance with Nill1EC's suggestion While we do not agree that MUF is merely a convenient means ror expressing the uncertainty on a given inventory or tnat the L thod used by ORO to arrive at loss percentages is necessarily not meaningful these matters are no longer pertinent to the section of the report to which NUHEe's com­ ments are addressed 6 ' The reoort stated- that on the _ basis of the taLa cumula­ the survey team's f il' gi- ngs tive loss was established at 178 kilograms U-235 as of October 31 1965 or 29 kilograms more than had been reported to AEC by NlJlvlEC in peri­ odic reports ' 7 _ --- - This statement standing alone carries the inference that NU C had understated its losses to the extent of 29 kilograms It should be noted that the last report made by NUMEC and based on a physical inventory had been 72 I 'f · · APPENDIX I I I Page 8 submitted more than six months prior to the date of the above-referenced report One would naturally expect ad­ ditional losses in the course of processing additional material over a six-month period Accordi ngly lYe sug­ gest the deletion of the words 'or 29 kilograms more than had been reported to AEC by Nm 1EC in periodic reports ' We did not intend to imply that NUHEC had deliberately under­ stated its losses but intended only to poi nt out that t he AEC sur­ vey disclose recognized significant losses in addition to those previously To avoid possible misinterpretation we have deleted reference to the additional losses in the report the report extracts three statements of opinion by the AEC regarding the most rE cent inventory and survey at NUHEC Briefly they are a NUf'1J C di d not rna intain cornple te records of kno'''n process losses and losses are there­ f orE- under s ta t ed Jib Lc'1bel data Here not adE quate to provide an accurate inventory lie NUj ''fEC di d not include certain filters in its inventory report Your report extracts from a 'NUNEC letter of January 25 1967 to AEC C1 SllJft I a ry of our po si tion vi th res pee t to Item 'b' abovl It should be noted tha t our letter a Iso expressf d a very cl C r po it ion wi th re spect to Itel'lis 'a' and 'c I r Ji til r Sp2C t to the unde·r stat2I11ent of knO'dn pro­ cess lQsses H'2 pointed out that extensive data o rhich had already L en m lclc availe ble to the AEC on losses through stack cHid liqu i d effllJt nt discharges had D yt been re­ flectC -d i f i t 1l· l cporj s to th C011 ds ion becatJsE of our uncert 1 int y i 7' h J - 's'l ' 'c t to c be · ·jE nl of ClTJPcJrtioning ' these lo 2E by cOlltrCict IE nU'L t d furth r tha t a prorati ng Clgreem£ nt l 'I _ achc d wi th AEC vTould eliminatt this I I I I I I t 73 I I I I APPENDIX III Page 9 problem henceforth He specifica lly noted tha t NlJtlEC had never failed to report a known process loss which could be associated with a specific contract Wi th respect to Item 'c' it may be '-lell to quote as follows from our letter of January 25 1967 to AEC in which it is made clear that any failure to report filters on our inventory report was the product of a misunder­ standing 'Your 0plnlon notes that there are a nwnber of con­ taminated air filters stored without a measured con tent and that there apparently was a misunderstand­ ing with the AEC concerning the inventory of these items It was our understanding that the AEC planned as they had done in N vernber 1965 to measure all of these filters independently We re­ gret that a misunderstanding existed regarding the measuring or filters and we are actively engag2d at this time not only in measuring the uranium content of these filters but in sorting out those which contain recoverable quantities of uraniun ' He suggest that these facts be included in your discus­ sion of our response to the opinions expressed by AEC as part of i ts Novemb r 1966 survey To more fully report on the circumstances resulting in AEC's opinion that NUMEC's stated inventory as of September 30 1966 did not fairly present actual holdings we have expanded our discussion of AEC's three stated objections and Nill1EC's position thereto II 8 During the Pf r Lod o_L_2 ur - ev L i' t 'le X_ound that addit ion§ lqss _s hj -d b Qen is lo_ ed and NUHEC's records sho ved that cumule tive losses of U-235 through December 31 196G have totaled about 260 ki lOj rams or about 1 2 percent of to­ ta 1 recei2ts ' Although we do not believe that the inference is in­ tended the foregoing statement carries the connotation that earlier loss reports were inaccurate The differ­ ence between the October 1965 loss estimate of 74 APPENDIX I I I Page 10 178 kilograms and the December 31 1966 estimate of 260 kilograms is almost entirely attributable to losses incurred in processing large amounts of material during the intervening period This should be made clear in your report II NUMEC's corrnnent on the addi tional losses during this period has been incorporated in the report 9 NUMEC's connnents in thi s section of its letter concern questions of fact as to the sequence of events leading to the settlement of the WANL contract After reviewing the evidence in our meeting of April 11 1967 NlwffiC representatives agreed that our presentation was in the correct sequence 10 ' FI g Q 1__ouL- 9J0 D a t t on of NUMEC I records we_ l otesJ__tJJ' lI-_1-2_ _ _ -9 IL_ i thl'ough Apri 1 1 9 6 1 ' e__ g 2 _ J lY_' Q --i g n t i f i ed as r e s u 1 t­ in _fE Q ls-no ·in lo s ra chapi §'IB i This is in large pClrt a result of our uncertainty Tith respect to the best means of pro-rating losses through effluent discharge mechanisms See discussion under Item 7 abovp The pro-ration agreement recently reached between AEC and NULvIEC wi ll e1imi na te thi s prob­ lem r The report discusses improvements which NUl'lEC has made in its practices and those which it has agreed to make NUNEC' s comrnent in this instance does not appear to require further report ampli­ fication 11 _ ' _ _ __ NUMEC __ _ Further L_________ under the agreement l i agr i d t 0 _l2 in t r t 0Il-l Il un t s 1n _ Q§ i _ § J b £ '_q L n _t Q_ De c er p eY -_2 3 l-19 6 5 ' l'It may be use u to note that the specified rate of inter­ est Tas six percent II 75 s APPENDIX III F'age 11 In accordance with N lEC's suggestion we hav noted in the re­ port that the interest rate under the supplemental agreement to WANL contract was 6 percent 12 ' Generally AEC reports after detailed surveys would identify the nf ed for iJI J2rove­ ments lj ch in our opinion indicated serious weaknesses in NUr-1EC's system T creafter follo ving brief visi ts NUMEC Vloul_9 be comnli­ rnented fo· _ the prQRres s beiQ -l ie _ Suc ecd­ i urveys o ld there fter reci e _2rot-lems simi lar to those di sclosed in prior 1 '1 -V 0 c to b er IJ -r 6·­'-l_L ' E c·' I A _ an 1 1 1 LUS t a tIOD l n first surJ- ort notified NUr lEC J__ the need to establish controls so as to lcca _iz losses its most recent reDort i ssued tQ 1 Ul U 9_ n January 1967 recommended im·2 rovelD nts in thi s area I It is error to cite the record generally and specifi­ cally as it relates to the localization of losses as evidence for the proposition that AEe has been inconsis­ tent in its dealings 'lith NUHEC or that NUMEC has faile d to comply with AECls suggestions for improvements in the accountability system The objective of localizing losses as noted above - like so many other aspects of an accountability system - requires continuing effort That a recommendation of this type is repeated after a lapse of time is neither an indication of inconsistency on the part of AEC nor an indication of fitful or uneven com­ pliance by the Company Good accountability whether in the localization of losses or elsewhere is a never­ ending professional challenge In this connection it may be useful to note that our accountability staff is now being increased to 6 full-time professi o lal employ­ ees supported by 7 technicians and clerical personnel Suggestions for further improvement though repetitive on occasion more often than not reflect changes or refine­ ments in technology and an increasing degree of sophisti­ cation in the handling of special nuclear materials We submit that an acknowledgement of this fact would provide a useful perspective for your report 76 i APPENDIX I I I Page 12 ·' I i NUMEC's comments here are consonant with those contained in point 3 wherein Nill1EC stated That a recommendation relating to the localization of losses is made repeatedly is not an indication of a continuing deficiency but rather a call for increased effort to meet a continuously moving target As mentioned in the report AEC has on a number of occasions complimented and encouraged NUMEC in areas relating to its proce­ dures for accountability On the other hand the record shows that AEC has repeatedly cited weaknesses in NUMEC's system which were continuing in nature and in our opinion were serious For ex­ ample as late as April 1966 AEC reported that a recent audit of NUMEC's records confirmed the findings of prior surveys that rec­ ords which purport to control internal movements of material were incomplete and inadequate therefore it was not possible to iden­ tify with a high degree of accuracy the true physical losses which were attributable to any given contract Consequently while we agree that a sound accountability sys­ tem cannot remain static we believe the overall record of NUNEC's experience clearly supports the view that NUtIEC did not exert the sustained effort necessary to effect and maintain the accountabil­ ity system improvements necessary for the localization and timely detection of losses • J U S GAO Wash D C 77 Bell signed the letter to Mr Staats